Investment Real Estate Funding
There’s potentially a ton of money to be made in investing in investment real estate, but obtaining and building-out investment real estate requires financing. Not every investor has hundreds of thousands or millions sitting around to invest in real estate. In fact, most investors rely on some sort of financing to purchase and build-out investment real estate. Getting the right financing with the lowest rates is crucial, as every dollar spent in interest to a lender, is a dollar in lost profits for yourself. In this article we look at the investment real estate loans, and the options available.
What are Investment Properties?
Many people tend to confuse investment properties with second homes – but the reality is that investment properties are not the same thing as buying another home or a vacation home. Essentially, an investment property is any type of property that is:
- Not your primary residence
- Purchased and/or used in order to generate income or profit
- Acquired to take advantage of certain tax benefits
These types of investment properties are usually purchased to become residential rental properties, whether those are single family houses or multi-unit properties; commercial rental properties for businesses, whether that is for your business space or to rent out to other businesses; and/or property purchased to renovate, update, and then resale, or a property to “flip”.
Types of Commercial Investment Properties:
Commercial real estate, or commercial investment properties, are one of the top investments options for many people throughout the United States today – this has become more favorable in recent years as more and more people, families, and businesses have recovered from the 2008 Great Recession.
However, to make commercial investment properties lucrative for any business owner, you must first have a firm understanding of the commercial investment property world. This means that for a business owner to purchase commercial investment properties, an investment property loan must be secured – but this cannot be done without the business owner fully understanding what types of commercial investment properties there are, as well as which commercial investment property will best suit that business owner’s needs. The major types of commercial real estate investment properties include:
- Offices: Office buildings, particularly with multiple units, are the most popular types of commercial investment properties. There are three different categories for office building – Class A, Class B, and Class C. All of these office building categories are relevant to understand because they help determine the specific type of property a business owner is interested in.:
- Class A: Class A office buildings are typically the most recently built buildings available – this includes being extensively renovated. Overall, Class A buildings are easier to rent out to business owners, especially because Class A office properties are in heavily populated areas that are in popular locations with easy access to major amenities.
- Class B: While Class A buildings are easier to rent out with less work being needed, Class B office spaces are still a popular option for those business owners looking to invest in properties that may need some work. These Class B office buildings typically require a few minor repairs and upgrades, making these options more appealing to property investors due to the lower rates associated with purchasing Class B office properties.
- Class C: Class C investment office properties are often poorly located, and generally involve much more work for renovations and upgrades. Usually, Class C investment properties are purchased and utilized for redevelopment opportunities.
- Retail: Retail properties are often repurposed and utilized as strip malls, community retail centers, banks, restaurant hubs, and so forth. These retail commercial investment properties are often located in popular areas that attract a large customer base in order to businesses that rent out the units to thrive.
- Industrial: Industrial investment properties are usually purchased for, you guessed it, industrial warehouse uses. These industrial uses range from manufacturing sites all the way to warehouse storage facilities. Industrial investment properties often open themselves up to future investment opportunities for business owners.
- Multifamily: This type of investment property is essentially a residential rental property, such as apartment complexes and multi-unit apartments, ranging from four to one hundred units. These types of investment properties usually qualify for different types of investment property loans with varying terms and rates.
- Special Purpose: Special Purpose investment properties are unique in that they are actually commercial real estate properties that are constructed by the investor, such as self-storage facilities and churches.
Residential Investment Property Loans:
Residential investment property loans are often what many new property investors think of when trying to purchase investment properties. While residential investment property loans and commercial investment property loans share similarities, such as both are taken out for properties and uses that property as collateral on the loan for that property, there are many differences between the two types of investment property financing options. First off, residential investment property financing does not require a business plan – an essential component to obtaining a commercial property loan. Also, residential investment property loans are usually utilized for single family homes, vacation homes, and duplexes that may or may not be rented out part time.
Commercial Investment Property Loans:
So, what are the major differences between a commercial investment property loan and a residential investment property loan? As mentioned above, a solid business plan, coupled with a good credit score, are essential steps that are taken in order to obtain a commercial investment property loan. In addition to a good credit score and business plan, commercial property investment loans are typically more concerned with the benefits and necessary work needed to improve the actual property in order to see cash flow expectations. This is usually coupled with endless amounts of questions about cash flow, whereas residential investment property loans do not worry as much about this. Also, commercial investment property financing options tend to have loan terms between five to twenty years, whereas residential investment property loan choices are longer (typically because families will continue to pay off mortgages for longer periods of time than businesses).
What You Need to Know Before Obtaining a Commercial Investment Property Loan:
There are so many important aspects to obtaining a commercial investment property loan with favorable terms and rates. Some of the top priorities for any business owner looking to obtain commercial investment property financing include:
- Credit Score and Business Plan: As mentioned above, having a great credit score and business plan are some of the most essential steps in obtaining a commercial investment property loan.
- Type of Investment Property: Before obtaining a commercial investment property loan, every business owner must know what type of commercial property they are interested in and how much work they are willing to put into the commercial real estate.
- Investment Property Uses: Understanding what the ultimate uses of the property will be, such as flipping the property, utilizing 51 percent or more of the property for personal business uses, or renting out the property to other businesses, should be a top concern for every investor.
- Having a Down Payment: Having access to a down payment, or viable collateral, is unavoidable when trying to obtain a loan, so understanding the various resources at your disposal should be a main focus.
Types of Investment Property Loans:
- Bank Loans: While not always easy to obtain, a bank loan or line of credit for commercial real estate is probably the best option for investor’s looking to maximize their profits by borrowing money cheaply. While many investors would prefer to get a loan from a bank, its not always easy to obtain – particularly for real estate investors. If the property is an office building with large rent rolls and clear cash-flow, your chances of getting funded will increase. But if your goal is to fix-and-flip residential real estate, the chances of getting funded are slim.
- Private Loans: Non-bank lending options for commercial real estate owners and investors is another common option for property-owners seeking financing. Private lenders can offer an array of financing products that banks generally don’t provide – especially for investment real estate owners. Private loans come in a variety of forms, including fully-amortizing mortgages, balloon mortgages, bridge loans, mortgage refinancing and cash-out refinancing.
As mentioned earlier, getting the lowest rate is essential to maximizing your profits. Not just getting the lowest rate, but also getting the best structured facility is important to make sure the purchase, build-out and sale goes smoothly. If you need help learning about all the investment real estate loan options, and need help with the financing process, please feel free to reach-out to one of our investment real estate loan experts, and we’ll help you navigate the process.