Commercial Real Estate Financing: 4 Tips for Success

For real estate investors who have no desire to deal with the financial aspect of the situation, wholesale real estate is always a great option.

You're essentially acting as a "middleman" between a buyer and seller. You negotiate one price with a seller and a higher one with a buyer. The difference between those two numbers becomes your profit, and you get the opportunity to create a mutually beneficial situation for all involved.

That said, there are many areas of the industry where financing will need to become one of your top priorities - with commercial real estate ventures being chief among them. Only by putting together a viable strategy today will you be able to rest easy knowing that your bases are covered tomorrow.

1. Know the Different Loan Types

The number one way to ensure you're ready for commercial real estate financing involves understanding the finer points of commercial real estate loans.

These are precisely what they sound like - a specific type of mortgage you get not for personal property but for places like offices, warehouses, or anything else that will be used to generate income.

Unlike residential loans designed for individuals, commercial real estate loans are for business entities. Because there is an expectation that the property will be generating revenue, they tend to come with higher interest rates and higher monthly payments as well. The property in question will act as collateral on the loan, and because of all the above, they tend to have a lower LTV (loan to value) ratio than their residential counterparts.

Again, depending on your needs, there are a few distinct types to choose from. Going beyond a traditional commercial mortgage, you also have an SBA 7(a) loan. This is from the Small Business Administration and can be used to either buy and renovate an existing property or construct a new one. You can borrow up to $5 million through an affiliated lender.

SBA 504 loans are another viable choice that are designed explicitly for owner-occupied real estate. Note that these can also be used to purchase long-term equipment.

Conduit loans are a type of securitized commercial mortgage. They have more flexible requirements, which may make them an excellent choice for someone who couldn't qualify for a traditional commercial real estate loan. In most cases, paying them off early will incur significant financial penalties, so you always want to be careful to understand your options before making a decision.

2. Build Strong Financial Statements

As you work through the financing process, the importance of building strong financial statements will quickly become evident. Take Profit and Loss statements, for example - here, you're trying to show either that your business can make money relative to the amount you're spending to get it up and running or that it is on a trajectory to do so.

Nobody will give you a commercial real estate loan for a property if you have no hope of paying it back. If the property's business isn't generating revenue, or if the investment itself is an objectively bad one, you will have difficulty securing financing. Building a history of strong financial statements will show lenders that you have considered these things.

3. Cultivate Relationships With Lenders

As is true with so many portions of our professional lives, so much of your commercial real estate financing success comes down to your ability to cultivate relationships with lenders. In this context, it means trying whenever possible to secure all your financing from the same sources, showing that you have a strong history of paying on time and in full and that you've created a mutually beneficial relationship for both yourself and the lender.

You're more likely to get a commercial real estate loan from a lender with whom you already have a successful relationship versus working with an entirely new one, for example.

4. Be Prepared for Due Diligence

Finally, be prepared to do extensive due diligence about the property you want to purchase as a part of your commercial real estate financing strategy. Whether you're applying for a loan or trying to get other investors on board, people want to see that you've already put the legwork in and know full well what you're getting into.

This means understanding not just the sales history and the potential renovations that need to be made to the property but also learning as much as possible about the area. Is it an up-and-coming area, or is it past its prime? Based on what you plan on using the building for, are there other attractions or points of interest in the area similar to yours? How are they performing? What is the likelihood that your property will begin to generate revenue? How much will that be, and how long will it take?

These are all questions you'll need to answer for yourself well before the beginning of your commercial real estate financing journey.

In an immediate sense, a well-thought-out financing strategy guarantees the smoothest and most successful real estate transaction possible. This is crucial in an inherently crowded and competitive world like commercial real estate. If your part of the deal were to fall apart, someone wouldn't have to look very hard to find another who can step in and keep things running to their satisfaction.

However, by implementing some of the key recommendations outlined above, commercial real estate investors and developers alike go a long way toward navigating the complexities of the financing process. They can do so confidently, ultimately increasing their chances of securing the necessary funds for any project they set their sights on.

This is how you do more than just facilitate a successful transaction today. It's how you start to lay the groundwork for your reputation - one that will turn that single transaction into a long and successful career. For many investors and even real estate professionals who are new to the world, this in and of itself is the most important benefit of all.