What You Need To Know About Commercial Real Estate Financing Types
If you’re thinking about pursuing a new business property, there are many factors to consider before making an offer. Figuring out where to get financing and what type of financing to choose can make a huge difference in the process. This guide can help you make a smart decision.
How Large Is Your Business?
Some types of financing are mainly available to large-scale businesses with extensive revenue, cash flow, and business assets, such as commercial property developers. These complex financing types usually provide customized terms for different stages of a project. They may even include equity, where your business gives up part of its ownership stake in return for funding.
Small businesses don’t have to worry about these details. There are plenty of other commercial real estate financing options available that are simpler to arrange.
What Are Your Long-Term Goals?
The next factor that affects your choice of financing is how you want to use the property that you’re purchasing. There are three main objectives related to real estate:
- Owner-occupied properties: This is real estate that you intend to use for your business operations long term. For example, retail stores, offices, or warehouses are directly related to your company’s operations.
- Income properties: This is real estate that you want to purchase and lease to tenants. There is a large range of investment properties, from homes to commercial office space.
- Investment properties: These are properties that you want to buy, improve and sell at a profit. Sometimes, the goal is to sell as quickly as possible, and other times, you wait for the market to increase in value.
Different types of loans have advantages for each of these long-term goals. For example, with owner-operated real estate, you mainly want a long-term loan (20 or 25 years) that has the lowest possible interest rates.
How Is Your Credit Rating?
A final consideration is what type of business credit score you have backing you up. Conventional mortgages can be an excellent choice for large property purchases, but they often require scores of 680 or higher.
On the other hand, hard-money loans are short-term financing that are easy to qualify for. They have high-interest rates, however, so they’re mainly used for fast fix-and-flip deals where you plan on selling the property at a profit (or generating significant income in other ways) as quickly as possible.
If you own a small business, SBA 504 loans are another option for buying, remodeling, or constructing a building. They have minimum revenue and time-in-business requirements.