Whether it's your first time investing in real estate or you want to learn how to do it smart, the key is finding the right type of loan. For broader contributions, you can think of hard cash financing as a short-term plan and a mortgage as a long-term strategy. But the two are not mutually exclusive. You can start with a hard cash loan and convert to a mortgage later. Even if your business has the money to buy a property without financing, that's not always the smartest choice. Read on to learn more about CRE financing for your small business.
Financial Hard Money
Hard money loans are loans secured by property, usually from private lenders. For example, you can use a hard cash loan to get into the value of an existing property without liquidating the property. If your multi-family property is worth $1M and you take out a hard cash loan of 80% of the property's value, you will receive $800K in financing. The loan eliminates the need to sell the first property before acquiring the second. But you can also build your portfolio by keeping both properties.
Here's a quick breakdown:
- Good: Hard cash loans enable quick asset acquisition. They can be approved quickly, and you don't have to wait to sell the old property. These loans work well even for businesses that don't have enough credit to qualify for a traditional bank loan.
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Disadvantages: Hard cash loans tend to have higher interest rates because of their shorter terms and higher lender risk. These loans also require collateral, which can present a barrier to businesses that don't have many assets.
Adoption
Hard cash loans allow you to “buy and hold” or “buy and resell” property quickly. They make growing your business easy, whether you need more space or want to take up more space. If this is the first location for your business, you can use the new location to secure the loan. Hard money loans also give you an advantage in the market because you can make a cash contribution.
Rehab
Hard money lenders can base your loan on the ARV or After Repair Value of the property, giving you more than the purchase price. You can use the rest of the renewal fee. If you flip properties, the faster you can get to work, the faster you will build income. Hard money lenders approve loans in a matter of days or hours compared to the days or weeks you might have to wait for a traditional payday loan. If you don't plan on keeping the property for 25 years, you won't want to pay for a 25-year mortgage.
Bridge Financing
Bridge financing covers your current expenses while you wait for another source of money, whether it's a loan or income. Investors often use this financing for income-generating areas such as hotels and rentals. A bridge loan pays for the cost of the property, which you can pay off when the property starts to pay off. Nurses use them to bridge the gap between their initial investment and the resale of the property.
Bills of Sale
Commercial loans are long-term loans designed for investors who intend to keep assets for many years. Unlike hard cash loans, they do not require existing assets to be secured. When you're looking for a loan from a bank, SBA, or USDA, you're looking for a commercial mortgage. They often have repayment terms that extend beyond the term of the loan, which reduces the interest you pay over the life of the loan. Since they carry less risk to lenders, they come with lower costs than hard cash loans.
- Good: Real estate payments are lower than what you would pay on a mortgage, allowing you to save more money each month. They also require lower payments and have lower interest rates.
- Disadvantages: Commercial mortgages take a long time to get approved and can have a lengthy application process, which is not ideal if you need to act quickly.
Long Term Ownership
The average commercial loan is 7-10 years with a 30-year repayment schedule. That makes them a better choice if you're keeping the property in your portfolio rather than reselling it. Long-term loans – up to 25 years for an SBA loan – are also available to reduce costs even more.
Shopping with Time
Commercial loans allow you to build equity. As the balance decreases with each payment you make, the property appreciates, adding to your balance. You can use that equity to finance other investments. With a variable rate loan, you can pay less in total than if you paid off the entire property at once. That's because your interest rate can decrease over time.
Reducing Down Payment
Commercial mortgage down payments can be less than 10% of the loan. That's 10-20% less than a typical hard cash loan down payment. That makes a mortgage a better choice if you don't have the money for a big down payment. Lenders expect you to be there for a long time, so they consider these loans to be low risk.
Despite the differences between hard cash loans and commercial loans, you may be wondering which one best fits your specific business goals. The easiest way to overcome this dilemma is to meet with the seller. Our brokers save time and money by matching you with the right lenders faster than you could find on your own. Because of our special relationships with lenders, we can also get better deals.
Whether you are investing for the short or long term, a broker is your best tool to do it right.
