Commercial real estate (CRE) financing gets you the necessary capital to buy, develop, or refinance an income-producing property. This could be an office building, apartment complex, or warehouse.
People rely on CRE financing because it solves a massive problem: lack of liquidity. Since most commercial properties are costly, they far exceed the cash resources of even successful business people.
Therefore, the financing process provides a trusted system for lending large sums of money. However, getting this loan without a well-thought-out plan is risky.
If you accept a loan without comparing terms or borrow more than the property’s income can cover, you create a dangerous financial situation. These potential risks can deplete your operating cash and put the property at risk of foreclosure.
That’s why we’ll list some smart strategies for commercial real estate financing that’ll get you the required capital without risking your business and financial security. Keep reading.
Look Beyond Just a Bank Loan
Let’s suppose you need $1 million in commercial real estate financing and go straight to one bank. That bank approves a $600,000 loan, which inevitably means that you have to find the remaining $400,000 yourself. As a result, your cash will be tied up, and you won’t be able to invest in any other properties.
But if you optimize your capital stack with a layered approach, it’s safer. Continuing the same example, you’ll use the bank’s $600,000 loan (repaying it will be your priority as it’s still the major chunk of cash). Then, you acquire a middle loan of $200,000 to fill the gap between how much you want to invest and what the bank lent you. And lastly, you’ll put in $200,000 of your own cash.
Now you’ll control a $1 million asset with only $200,000 of your personal wealth, instead of $400,000. Later on, if the property’s value goes up, your profit percentage on your invested cash (your ROI) is much higher.
But remember that borrowing too much (over-leveraging) will create massive debt payments, so find the sweet spot. The optimal Loan-to-Value (LTV) ratio is 70%-80%, meaning that you borrow 70-80% of the money going into a CRE project.
Don’t Always Go for the ‘Easy’ Loan
Most people default to a regular commercial mortgage, but different situations call for different loans. For example, if you’re buying a building for your own business, a standard commercial real estate loan will likely demand a high down payment and a shorter repayment time. And that’s when you opt for small business loans like SBA 504 or a 7(a) loan, approved by the US Small Business Administration (SBA). These loans require lower down payments and more flexible repayment schedules.
And if you have found an excellent property that needs some renovation to increase its rent before you get a long-term mortgage, a bridge loan works best. These are short-term, higher-interest loans that get approved pretty quickly.
Similarly, when you’re in a rush to close a deal (like an auction or a competitive bidding war), a bank’s slow process won’t help. This is when you turn to a credible lender for business financing to get approved and lock the deal in time.
Put simply, always decide based on your business’s current situation instead of following a familiar path, because financing can be done in many ways.
Make the Seller Your Financial Partner
Sometimes, a seller is willing to help you buy the property if they want to sell quickly or benefit from tax breaks. If you find anything of this type during negotiations, you must grab the opportunity.
Let’s say you need to buy a $5 million property, but the bank approves $3.5 million. Since you have a $1.5 million gap in this situation that you can’t fill, the deal dies. If you ask the seller to “carry” the $1.5 million gap, it could make a huge difference.
Sellers do this when they’re working with a hard-to-finance property (like a non-standard asset), or they want to spread the money over years instead of getting a lump sum amount. If the deal works, the bank lends $3.5 million, and the remaining $1.5 million is the seller’s responsibility.
As a result, you negotiate the interest rate and payment schedule with the seller and operate the property before you are required to purchase it, thereby lowering your risk.
Put Money to Work—The Smart Way
Making a business successful takes extensive planning, and financing is the main part of that planning. The money you need to buy or upgrade a business is out there; you just have to approach it safely.
So when planning a commercial real estate venture, remember the strategies explained above to keep your wealth safe.
And if you need fast, reliable, and hassle-free commercial real estate financing, ROK Financial is a call away. We make sure you get the loan on time and without putting anything on the line!
FAQs
What is the main difference between financing a home and a commercial property?
A home loan depends on your salary and credit score. However, a commercial property loan is based on how much money the building makes because lenders care most about the building’s rent income, not your personal job.
Can I use a loan to also pay for renovations or construction on a property?
Yes, most lenders allow you to use a CRE loan to cover renovations or building work. If this is your goal from day one, the borrower might release your loan in stages as the work is completed.
If my commercial building goes bankrupt and I lose it, can the bank take my house too?
It depends on the loan contract. If it’s a non-recourse loan, the bank can only take the commercial building. But if yours is a full recourse loan, it means the bank can take your house or personal savings to cover the money you still owe. So always understand the details before signing.
