How to Leverage Commercial Real Estate Loans for New Investment Projects
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
Building a great portfolio doesn’t happen overnight. Indeed, many new investors dream about having a diversified portfolio full of real estate and other investments. Yet, the most seasoned real estate investors know that this industry is truly a marathon and not a sprint.
Cliches aside, here’s the reality: investing with cash only gets you so far in the real estate world. Between permits, construction, renovations, hiring people, and more, you may find that the war chest you thought you had is more like a jewelry box.
Yet even a jewelry box doesn’t have to be large to contain treasure. But if you are looking for the best way to grow, it’s time to step away from cash and look at commercial real estate loans.
Is Cash Better Than Financing?
Many people search to find out whether or not cash is better than financing; it’s a pretty common search term these days. However, the truth is that this question is hard to answer. Are you so conservative as an investor that you only want to work with your own money? If so, then the cash route is going to be your best option.
However, if you’re willing to take a risk and go with more leverage, then financing is the way to go. CRE loans are designed to help investors make the most out of not just purchases but development.
If you dream about stepping into real estate development with a group, financing is the road to that arena. Most investors buying bigger properties together will use a combination of cash and financing to move a project along.
Having cash is a good way to begin your journey because it is very useful for hiring teams and doing things that require immediate payment. However, as you begin to grow your portfolio, you’ll find that seeking financing is simply part of the journey.
The Benefits of Commercial Real Estate Loans
Just as your car needs gas to get places, your real estate deals need money to flourish. Sure, in a perfect world, you’d have every bit of money you need to scale your portfolio up as high as you desire. Unfortunately, we have to work within our own limitations, which means that cash is definitely limiting.
But commercial real estate loans are built with investors in mind. You will still have to bring your own money to the table, at least until you build up a track record, but getting a commercial real estate loan isn’t as difficult as meets the eye.
The benefit here is that you aren’t putting all of your own money into one project, thus spreading your risk around.
Tips on Taking out a Loan for Commercial Real Estate
If you’re going to look into taking out a loan to take advantage of a new investment project, there are a few points to keep in mind. Here’s what you need to know:
- Study the terms carefully. Looking at the fundamentals of a loan against what you plan to gain from the potential property is very important.
- Pay close attention to the interest rate. It’s very easy to focus only on the monthly payments, but you have to think about the interest that you’re taking on as well.
- Shop around. Going for the first loan offer you receive is a good way to get terms that just aren’t favorable. Take your time and make sure that you still have a profitable deal even with CRE loans in play.
- Consider if you will have a cosigner. If you’re having trouble getting a loan, adding a co-signer or agreeing to put down more money are two great options to get a loan approved.
- Don’t borrow too much. Qualifying for a certain amount is one thing, but that doesn’t mean that you have to borrow that amount. Start with a smaller target and work your way up to larger deals.
As you can see, the tips above aren’t beyond common sense. However, the thrill of a new deal can often lead investors into deals that really aren’t good transactions once due diligence principles are put into practice. Don’t sign anything until you have looked over the loan terms in full. In fact, having someone look over the entire contract before signing is even better!
Other Cautions for Commercial Real Estate Loans
Remember that even in the best-case scenario, we never fully have all of the details. Markets come and go, and a market can change to the point where a deal that was stellar at the start is no longer as good. This means that you still have to prepare for the worst to come, even if everything looks good.
Holding costs in commercial real estate are much higher than their residential real estate counterparts. Prepare for vacancies, as well as delays in renovations. With supply chain issues still going on in the "post-pandemic" era, projects are taking much longer to complete than in the past.
Labor and material costs are also higher, so you need to take that into consideration as well. If you’re using part of the loan proceeds to fund renovation work, you may want to plan to have some of your own money involved as well in order to close the project completely.
Embrace Your Own Leveraging Journey
If you’re looking into taking advantage of new investment projects, going with commercial real estate loans is the way to go. Not only will you be able to close on more projects with loans, but you’ll also have a bigger chance to grow your portfolio. Once you have more successful projects, the good news is that subsequent loans become much easier to obtain.
Don’t let a slow start discourage you; there are plenty of lenders willing to support your real estate investment goals and give you loans to help get projects off the ground. By following the tips in this guide, you’ll be well on your way to getting financing for your next project that makes sense.
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