Real Estate Financing

What Is Real Estate Financing?

Real Estate Financing for Resale

If you plan to start a business flipping houses, you should know that some typical mortgage loans may not be available to you. Most conventional mortgages accessible through banks are meant for first-time home buyers and are backed by the Federal National Mortgage Association (FNMA) (Fannie Mae). To be eligible for these loans, you must have lived in the house for at least a year. As a result, a typical mortgage will certainly not work for you if you’re trying to flip houses quickly to avoid paying property taxes and mortgage payments.

Another important aspect of successful real estate investing is building up enough business savings to pay cash for new real estate investments. You’ll have to pay origination, appraisal, underwriting, private mortgage insurance, and other expenses every time you take out a loan, all of which eat into your profits. Furthermore, many of the best “house flipping” prospects are near-foreclosed homes that are unlikely to appraise.

You can use real estate financing to start your home renovation business, but you should eventually fund your real estate investments with revenues from other sales.

Real Estate Financing for Rental Properties

Financing a rental property is typically less complicated than funding a house to flip. Many novice real estate investors choose to secure a traditional mortgage and live on-site with their tenants for a year or two. However, when your company grows, you may not be able to reside in every house and will need to consider alternative options, such as commercial real estate loans or cash purchases.

Commercial Real Estate Financing

Commercial mortgages and other business loans are available if you need to finance the commercial property. Purchasing or upgrading a company location is frequently a significant step forward for small firms, as real estate is an important economic asset.

Consider whether you want your firm to be in that area long-term and if you’re happy with the neighborhood’s resale value before buying a commercial property. You will be solely responsible for your property, including property taxes, utilities, and repairs, which may or may not be covered by your current commercial lease.

Here’s what you need to know about acquiring a commercial real estate loan if it’s suited for your company.

Types of Real Estate Financing

Term Loans

You would be applying for a term loan if you went to a bank and applied for a typical business loan. A term loan is a loan designed to be repaid over a predetermined period with a fixed payment amount. Regular business loans can be used for a range of purposes, including purchasing real estate or the renovation of an existing facility. A term loan can be obtained through a bank or a private lender online.

Commercial Real Estate Financing & Loans

Business owners and franchisees can only use commercial real estate loans to finance new commercial space or renovations. Commercial loans are divided into interest rate reset loans and balloon payment loans. Your loan will have a fixed interest rate for the first few years of an interest rate reset loan, but it will begin to fluctuate according to market conditions. Loans with interest rates reset typically have longer periods than loans with balloon payments. A balloon payment loan has a shorter term and lowers monthly payments, but the borrower must pay the loan’s remaining balance after the term ends.

SBA Loans for Commercial Real Estate

Some SBA loans can be utilized to buy real estate if you’re a small business owner. CDC/504 loans are designed for substantial, long-term expenditures such as commercial real estate purchases or the construction of a new facility for your company. SBA 7(a) loans are available in sums up to $5 million and can be used for various company needs, including the purchase or renovation of commercial real estate.

Pros and Cons of Real Estate Financing

Pros of Real Estate Financing

Because the property itself can be used as security, business owners don’t always need to offer additional collateral to receive a loan, as they would for a bank loan. If the lender is concerned about the business’s credit score, some business owners may be required to give a personal guarantee or an additional asset as security. Because real estate safeguards the lender’s investment, real estate financing might have a lower interest rate than a standard loan. You can use a business mortgage broker to locate the most acceptable financing for your real estate deal at the lowest interest rate.

A home equity line of credit is another benefit of owning real estate (HELOC). After you’ve paid off your mortgage, you may be able to get a HELOC, or home equity loan, secured by the difference between the value of your home and the amount you owe on your mortgage. Because HELOCs are secured loans, you can avoid some of the higher interest rates associated with other types of loans in the future. However, it’s vital to keep in mind that a HELOC may not be an option if you don’t plan on living in the house full-time.

Cons of Real Estate Financing

One of the disadvantages of commercial real estate financing is that many of the residential loans available to homeowners are not available to businesses. Businesses, for example, are unable to obtain a Federal Housing Administration (FHA) loan for wholly commercial buildings. On the other hand, business owners are limited to particular commercial lending methods.

If you’re searching for a loan to buy a property to lease some or all of the space to other firms, you may face additional challenges. Specific types of real estate financing may not be available to you in some instances. For example, SBA-backed CDC/504 loans are only eligible to companies that will occupy at least 51 percent of a property.

Prepayment penalties are frequently imposed on commercial real estate loans. If you choose a shorter-term real estate loan, you’ll almost certainly be required to make a big balloon payment after the term. If you can’t pay the balloon payment in full after the term, you’ll have to take out another loan to cover the remainder, which many business owners may not be comfortable with. In general, commercial real estate financing should be carefully considered, and you should prepare your firm for it before proceeding.

Applying for Real Estate Financing

Because real estate is a substantial investment, obtaining a real estate loan is more complex than getting a short-term loan. Lenders will be highly interested in seeing a detailed business plan if you’re interested in a property that will be used to create money.

The specific information you’ll need to supply on the loan application will determine how you intend to use the property (for example, if your company will be utilizing the entire area or purchasing a building to lease to other businesses). However, much of the same information that you would need to supply for any other type of company loan would be required, such as:

• Resumes for yourself and your partners or other principal employees
• Copies of business and personal tax returns
• Lists of individual debts and assets
• Income projections for the next 3-5 years

Your loan-to-value ratio (LTV), which is tied to the size of your down payment, will be taken into account by lenders. The loan amount is compared to the property’s total purchase price to get the LTV. For example, if you can make a 20% down payment, the lender will give you an 80 percent loan on the home. Lenders frequently seek LTVs of 80 percent or less since a low down payment exposes the lender to increased risk.

Your debt service coverage ratio will also be considered by lenders (DSCR). Your DSCR calculates the difference between your annual net operating income (NOI) and your annual debts. This assists lenders in determining the amount of cash flow you generate. As a result, lenders are more likely to grant loans for companies with a DSCR of 1.25 or higher.