Adding a commercial property to your investment portfolio may be a very good idea, even for those who are just getting started in developing passive income streams. CRE offers the advantage of being a true silent investor, particularly if investing with a group and having all aspects of the building management handled by a professional commercial real estate management team.
For first-time investors, particularly younger individuals or couples with limited savings or equity, funding may be one of the biggest challenges in entering the world of CRE investing. In these situations, there are options and opportunities to consider finding financing for these investments that often have a very high return on investment over the long term. It is critical to understand that the commercial property may not immediately be a source of revenue, and there may be additional expenses to consider for tenant upgrades, building modernization, and full retrofit requirements for plumbing, electrical, and HVAC systems.
Traditional Funding Options
Obtaining funding through traditional means, including banks, credit unions, investment funds, or private financial institutions, is typically the first route most investors consider. The interest rates with these types of funding sources are usually competitive, but borrowers will need to have minimum credit scores, a good credit history, and limit their borrowing to the cap set by the lender. This is determined by your debt to ratio and any assets you hold as the borrower. It is difficult for most borrowers to get approval for a CRE loan through traditional lenders unless they have significant collateral, excellent credit scores and history, and a low-risk CRE investment proposal.
Alternatives to Traditional Loans
Alternative funding sources are possibilities for most borrowers. There are several options to consider that provide more flexibility for repayment and often a less involved process for applying for the funding. Alternative funding sources can include options such as crowdfunding, lines of credit rather than loans, asset-based loans, or private loans. Be sure to understand all terms of the contract with the lender. It is wise to have an experienced CRE real estate agent review the contract. You may also want to have it checked by a real estate attorney. Both types of lenders will look at both personal and business financial records for any potential borrower. Applying for a CRE loan as a business may provide benefits that applying as an individual is not able to offer. This includes the ability to consider the business case flow and business credit score in addition to personal financial information. Turn to your commercial real estate agent as a resource in finding funding for the investment. Additionally, multiple investors with solid credit are a benefit even if your business or personal finances may not be ideal for traditional or alternative lenders to consider for a loan.
