Exploring the Best CRE Loans for Your Portfolio
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While we think that the world of commercial real estate (CRE) is accessible, it does take some getting used to. If you’re eager to dive into the world of CRE, you might be feeling a little overwhelmed right now. That’s perfectly okay. After all, we think everyone gets a little overwhelmed when they’re first trying to learn something new.
If you’re not sure where to start, then this guide on the types of commercial real estate loans should be at the top of your list. Unless you’re lucky enough to win the lotto, chances are good that you have a budget for real estate just like the rest of us.
Understanding Financing Options
No matter which way you go with the different types of commercial real estate loans, the goal is simple: you’re building a real estate portfolio, one step at a time. As long as you keep that goal in mind, you will not get sidetracked with financing.
Far too often do people get too excited about the possibility of buying a property, and they rush to get any financing that will approve them. That’s a recipe for disaster. Your real estate portfolio should always be by the numbers and not based on emotion. That can be easier said than done, but this should always be held as the standard for real estate.
What Are the Major CRE Loan Types?
You have your pick of loan types, but it’s important to think about loan use before you get too far ahead. What type of property are you interested in buying? Where is it located? The location allows you to tap into specific grants and loans. The USDA also has a grant program to explore if this is something you’re interested in.
Aside from SBA-backed loans, other loan types include blanket loans, hard money loans, and bridge loans.
If you’re just starting out, blanket loans aren’t going to be your first choice. They’re designed to help you finance multiple properties at once. Private investors or alternative loan companies usually offer hard money loans, and they are designed to help real estate investors that can’t get traditional financing.
Bridge loans are a type of short-term commercial real estate loan that is designed to acquire a property, but you’re expected to get long-term financing established after the bridge loan is over. If you don’t qualify for traditional funding yet, bridge loans are designed to still let you get the property of your choice.
Advantages Across the Major Loan Types
Each of the major loan types has plenty of advantages to consider. Here are a few of the advantages listed below:
- SBA-backed loans are guaranteed by government funds, which means that the terms are more favorable.
- Bridge loans are usually accessible even if you’ve been turned down by other lenders.
- Blanket loans are a bit more advanced and allow you to finance multiple properties at once without having to pay the same fees if you were to finance them separately.
- Hard money loans pay out faster than their traditional counterparts and allow you to get funding even if other sources aren’t available.
As you can see, the advantages vary based on what loan you’re working with. Of course, just as there are advantages, there are also disadvantages. We’ll cover those in the next section.
Disadvantages Across the Major Loan Types
Just as there are advantages to each loan, there are definitely going to be some downsides. We wanted to present both sides so you can make the best decision possible. Here are those downsides to consider:
- For bridge loans, keep in mind that they are designed to be short term, which means that you’ll have to seek conventional financing eventually.
- Blanket loans do allow you to save costs when multiple properties are involved, but the downside is that they cost more in terms of interest and fees.
- SBA-backed loans also help you save on costs, but they can take a long time to process compared to loans that aren’t partially guaranteed by this government agency.
- Hard money loans will carry higher costs than their conventional counterparts but usually have easier requirements.
Don’t let the disadvantages scare you away from the different types of commercial real estate loans. It’s just important to keep the downsides in mind when you’re making your ultimate decision.
Which loan is best for you?
If your creditworthiness and business structure are up to par, we recommend sticking with a more conventional type of CRE loan. This would be the best fit in terms of the lowest interest rate, as well as the most generous terms. Compare that with, say, a hard money loan that generally carries a higher interest rate since there is more risk involved.
No matter which loan type you go with, it’s still important to fall back on real estate fundamentals. The loan has to fit within your numbers in terms of carrying costs.
Should you turn to a real estate loan broker?
With so much research involved with a CRE loan, it may make more sense to reach out to a broker. Just like with residential loans, mortgage brokers can search through their entire network for the best loan to meet your needs. Whether you’re a seasoned investor or just starting out, you can find a broker that is more than willing to work with you.
Like residential brokers, they do make a commission from working with you. However, the benefit of a broker is to get a bigger picture of the loans available to you. Interest rates vary, as well as the total amount that you’re able to borrow. A good broker can package up all of the information and save you plenty of time that would otherwise go to research.
Take the Time to Find the Right Financing
If there’s one piece of advice we can give you for the long haul, it would definitely be to master financing your real estate portfolio expansion. The right financing truly makes it easy to pull off real estate deals. It doesn’t always come easy, and you’ll want to make sure that you always have the paperwork ready for the lender. This also means that you will need to get used to giving organized documents every single time you want to tap into generally available sources of financing.
Yet the upside to what feels like an awful lot of paperwork is simple: you’re getting used to being organized about what can become a very life-changing business. The more intentional you are in the CRE world, the more likely it is that you’ll build a successful portfolio.
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