5 types of loans to help investors grow their investment portfolios

It’s not hard to find deals when building your Commercial Real Estate (CRE) portfolio. The hard part is financing.

CRE is one of the most profitable portfoliosdespite offering advantages compared to residential investments Interest rates could be higher. Commercial investment real estate loans are one reason.

To understand how to invest in this sector successfully, you need to know how loans work and what options will serve you best. Many loans are available to commercial real estate investors, but each has its own rules. The one that works best for your needs depends on the circumstances.

For example, some investors may use multiple loan types to keep their CRE portfolio growing.

DSCR Credits

DSCR stands for Debt Service Coverage Ratio. According to the proposed name, DSCR Credits A measure of the cash flow available for the current debts that the company must pay. These loans work well for assessing the financial condition of a business or investor, helping to determine if the commercial property will generate enough income to make the monthly loan payments.

When calculating the DSCR, finance companies divide net operating income by total debt service. Net operating income is revenue minus the cost of equity capital. Total debt service includes payments of principal and interest on any outstanding loans.

Normally, your DSCR score must be above 1.25 to get funding. Anything below 1.00 indicates financial difficulties for the investor or company. Net operating income of $100,000 and total debt service of 60,000 produce a DSCR score of 1.67. However, if the same company has $95,000 in debt, that score is 1.05.

Hard money loans

Hard money loans are a safe haven for investors with less than stellar assets credit history.

This short term loan is a quick and easy way to obtain financing for commercial real estate investment. The disadvantage is that interest rates are high, and the repayment period is short. The investment is also a security for the loan, so this combination makes this option very risky.

Hard money loans are usually available from non-bank sources as well. Therefore, you will get it from individual investors, fund companies or investment groups. Given the terms of the loan, this is an option for flippers. If you want to quickly transfer ownership of a property, it may make sense to take out a hard cash loan.

It does not always work out well for someone looking to hold commercial rental property. It might be a quick fix if you know you have funding coming from another source, but waiting means losing the deal. A hard money loan can be a temporary stopgap until financing is available because it is so easy to get.

Hard money loans are also a way to improve the credit history of an investor looking to grow a CRE portfolio. However, it is a strategy that can either work well or fail miserably. Investors should know the value of the commercial property they wish to purchase before obtaining a hard cash loan.

The amount requested should cover any repairs or renovations as well. Otherwise, you may end up with a property that you can’t repair and have to sell for less to pay off the short-term loan.

permanent loans

A perpetual loan is a long-term mortgage loan that is provided once the property is completed and ready for use. The amortization period tends to be from 15 to 30 years. The average amortization period is 25 years. Funding can come from banks, credit unions, or even life insurance companies.

Permanent loans tend to replace construction loans taken out for new projects. A permanent loan usually has a lower interest rate. Therefore, you are allowed to pay off the construction loan and refinance the new property. For this reason, a permanent loan is usually the first loan taken out on the property.

However, a permanent loan can be obtained on an existing property. The age of the property will help determine the amortization period. Property over 30 years old may have a file Shorter repayment period.

Construction loans

Some investors are looking to boost their portfolios by building new commercial properties.

This is where a commercial construction loan comes in handy. Covers the cost of developing the property, including land, supplies and labour. The payment period depends on the construction schedule submitted in the application process.

A construction loan can allow you to maintain a manageable balance sheet while the building is developed. Payments during this time are often interest-only, so don’t even pay on principle Construction perfect. At this point, the investor sells the new property or refinances for a business loan.

The downside to construction loans is that they do not usually provide 100% financing. Instead, lenders target anywhere between 70 to 90 percent of the cost, requiring investors to have initial money for the difference.

Along with the interest, you can expect to pay escrow and processing fees. You may be able to roll this fee over to the loan or pay it off over time after construction. Permanent loan may also cover it.

Who offers construction loans? One popular source is the Small Business Association (SBA). These SBA loans will go through a commercial lender such as a bank or credit union. The SBA offers a guarantee on the loan.

You can also get a loan directly from a bank or credit union. But they will look closely at the investor before offering financing. They will expect you to have an excellent credit history and not be new to investing in commercial real estate.

Bridge loan

a Short-term bridge loan You can quickly get a property loan to get a deal on it or upgrade a property you already own.

The key word here is “bridge”. These loans, by design, have very short repayment periods, usually 12 to 36 months.

Investors They should only be used to take advantage of a deal while awaiting long-term financing. The financing agent will likely ask for collateral on the loan, which is usually the property you are buying or renovating.

Finding the right business loan is crucial to your investment strategy. Find a lender that specializes in the financing you need to get the best rate and approval chances.

Image credit: Niklas Jeromin; pixels. Thanks!

Diana Richie

Diana Richie

Managing the editor in ReadWrite

Diana is Managing Editor at ReadWrite. Previously, she was the Editor-in-Chief of Startup Grind and has over 20 years of experience in content management and content development.

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