Investing In Commercial Real Estate, Part 3

Friday, August 26, 2016 Written by 
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By Glenda Brass, MBA

 

Financing for commercial real estate is a completely different game when compared to residential mortgage loans. It can move much faster in some cases and is much more flexible. For purposes of this discussion, we are talking about commercial purchases that are non-owner occupied (for investment purposes only). For owner occupied commercial purchases there are other options like SBA and traditional banks for qualified individuals. We’ll cover this financing another time.

 

When purchasing commercial real estate, financing is the most significant factor in determining whether the project is worth pursuing. Although there are a variety of commercial real estate loans on the market, we are going to look at hard money loans in this article. 

 

Hard money loans for commercial real estate are often a matter of last resort. They aren’t good deals, but they can save a financing situation that has gone critical. Most hard money loans come with significant upfront costs and sometimes very high interest rates. When you are facing the prospect of losing a commercial property, however, they can be a godsend because they also are granted very quickly. 

 

Hard money loans are considered very risky and are issued by private financing groups, not banks or lenders. The loans tend to be only available as the primary loan on the property. Unlike home loans, hard money loans are all about the potential sales price of a piece of commercial real estate. The party considering lending you money is not necessarily going to look at the appraised value of the property. They are going to look at the probably sales price if the commercial real estate has to be sold a few months after making the loan. Depending on the condition of the property, this figure will typically be between 50 and 75 percent of the appraised valued of the commercial property. 

 

Put another way, a hard money loan is a short-term loan designed to get you past an immediate problem. It is undeniably a loan of last resort and is not an ultimate solution to a financing problem with a commercial property. It does nothing other than buy you time, and at a fairly hefty cost.  

 

Here are a few more specifics:

 

These types of loans tend to be equity based, such that you don’t have to credit qualify; that is, you don’t have to have pristine credit like you would with traditional loans. You don’t have to necessarily asset qualify; you can state your income and assets because remember…it is an equity based loan. Because it’s equity based, the amount of the down payment must be sufficient to provide the equity that the lender requires. For instance, if they require 30% equity, then your down payment would need to be 30%. 

 

The terms are generally shorter than bank loans ranging anywhere from one to three years. This means you’d need to refinance into another loan after the term ends. This is where you would strategize to transition out of the loan when it’s time to refinance into a more traditional loan. 

 

These loans can be closed in seven to 10 days in some instances and are great for getting you in the door, but you don’t want to stay in that room. As you move through the process, you’ll want to make sure your next loan is from a traditional lender which we’ll talk about next…

 

Glenda Brass has been in the real estate industry for over 16 years. She is CEO of Brass & Brass Enterprises, LLC, located at 2639 W. Manchester Blvd., Inglewood. For more information on buying, selling, or renovating real estate, call Glenda at 310-345-9707 or email This email address is being protected from spambots. You need JavaScript enabled to view it. .

 

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