With the housing market’s continuing growth, investing in a commercial real estate business can help save the company in which you’ve already invested millions.
When expanding your real estate business, you must assess your position as a buyer before you invest in any commercial commodity — seeking SBA Loans for your small business? Look at the flowchart below.
While a significant capital infusion can help finance your real estate investment property, opting for traditional bank loans is not in your best interest. There are plenty of alternative financing routes that you can choose from, mainly because you can pursue your dream and save millions of dollars at the same time with returns.
Mentioned below are five smart ways to finance a real estate business:
1. Hard Money Lenders
As opposed to traditional bank loans, hard money lenders provide business loans mainly for short-term projects. Since hard money lenders are typically private financers, they have their own set of rules that must be discussed before sealing a deal.
Their loan criteria are usually backed up by high interest, therefore, make sure you opt for a hard money lender only if you can bag equity with your investment and pay back the principal in time.
Since there are discrepancies in understanding the difference between the two terms, consider the above chart before opting for a loan. Hard money lenders fund real estate projects that they believe have the potential for growth.
Without focusing on any corporate procedures, they usually ask for a sizable down-payment that most investors can afford, especially if they are starting. In addition to the down payment, most hard money lenders require personal collateral or guarantee before financing your investment property.
Despite having a high interest rate of 10 – 12%, you must make sure that your investment qualifies for the hard money loan and enables you to pay back the loan according to the short-term turnaround time. Many myths are surrounding hard money loans, so research wisely.
If you don’t have an excellent personal credit history or score, then opting for hard money loans from private investors will be quite risky despite its flexibility of loan structure.
2. Cash Out Refinances
If you’ve traditionally invested in real estate properties before, you might be able to cash out refinances by opting for bank loans to invest in them all over again. By investing in pre-existing properties via traditional bank loans, you can extract the equity that has built up on your mortgage and use them as down payments for new investments.
In addition to funding your new investment property from the equity obtained through other real estate businesses, refinancing will allow you to lower your finances for your new investment property, making this funding option a win-win situation in both cases.
3. Small Business Association Loans
Small business Association (SBA) loans allow you to acquire current funding from a bank in addition to the government. The 504 and 7A SBA loans are quite popular in real estate financing, mainly because they have sizable down payments, which requires only 10 percent of the original investment and they have fixed interest rates.
Another advantage of these business loans is that they guarantee to fund the rehabilitation of the building, including equipment from several lending sources that are prime and available for you to choose.
They, however, require personal collaterals and guarantees from the investor in addition to high origination fees and prepayment penalties. SBA loans also require significant proof of business profitability in numbers in addition to a proper history of having sought and dealt in real estate investments through the years. SBA Loans by industry are explained below.
SBA Loans are flexible and trustworthy despite the demand for collateral and personal guarantees. Choose an SBA loan if you have a good credit history and substantial proof of profound bookkeeping in the real estate industry.
4. Private Money
While you need an attorney to sit through your business dealings with your private money lender, this type of loan is not only flexible but guarantees relaxation from both parties. Private money loans are dealt from individual to individual and usually span from 3 to 5 years, depending on the financial draft or commitment between the two parties.
However, these loans require high-interest rates, but the down payment can be discussed between the lender and the investor for flexible means. They are more personal than any of the conventional financing methods mentioned above.
You can seek these loans from friends, family, or from anyone who shows interest in financing your investments for mutual return policies. However, draft your policies and terms in the presence of a lawyer, to avoid any discrepancies or feuds in the future.
5. Marketplace Lending
Marketplace lending or crowdsourcing is another brilliant option for real estate capital seekers and individual investors. Marketplace lending provides a platform with a mutual opportunity for investing in real estate projects for both the parties involved. Differences between models of traditional bank lending and marketplace lending are explained in the chart below.
Equity-based marketplace investment allows funders to share the equity with the investor of the real estate project with a perk of its own. If the real estate project fails and doesn’t show the returns in numbers as expected, the project funders or sponsors can waive off the demand for payback on loan.
Debt-based investments, on the other hand, allow the lender to fund the project with a guarantee from the investor who must pay back the loan in bits and pieces to secure the deal. They provide the investor with better leverage than the ones based on equity. Any revenue generated by the business or returns earned with the help of the borrowed funds is deposited to the investor’s end of the deal.
While you can opt for any of the two, choose the one that gives you enough leverage and space for processing your returns, interest rates, and pay back loans at the same time.
The Final Verdict
In addition to the above-mentioned business loans, financing a real estate business in any age requires diligence and vigilance from both parties, especially if you opt for hard money lenders and private funders. Plan out your real estate business strategy before you invest in a market that seems quite appealing and lucrative. Make sure that you have assets to invest in real estate before you’re knee deep in debt due to high interest with no returns to show for your investments.