The 5 Types of Commercial Real Estate Financing

When you are investigating your options for commercial real estate financing you will find that there are really only 5 choices. Understanding these choices will allow you to select the one that is best for you.

One of the more common methods for commercial real estate financing is to work with the Small Business Association for the loan. The loan is not actually coming from the SBA but there are certain lenders who work with the SBA and agree to meet their loan terms. The reason that these loans are very desirable for borrowers is that they offer very favorable terms. The biggest benefit might be in the down payment which is normally only 10% when other lenders are requiring over twice that amount. The loans also are fixed rate and can be used for building improvements. The disadvantage to these loans is the lengthy loan application process and the collateral and personal guarantees that are required.

Conventional commercial real estate financing is funded through a bank or other lender and was the primary source for commercial real estate financing prior to the advent of the SBA. These institutions still offer a great many commercial loan options but the biggest drawback is the down payment that is required. In most cases, the borrower will need to be able to cover a down payment of 25% of the cost of the property or more.

Seller financing is a method that is not common any longer. This is more of an old time practice and is not possible today in most cases. The option is good for the seller if they own the property out right and can collect the interest on the payments. The only benefit for the buyer is the fact that they can avoid some of the fees associated with a commercial lender. There is no need for an appraisal or the loan application and processing fees that a traditional loan would include.

Third Party Options

Third party financing is also a method from the past but it can still occasionally be an option. This is when you borrow the money from a person that you know. In many cases it is a person who has a nice retirement nest egg but does not have it invested. The benefit for the lender is that you will be paying interest to them and their nest egg will finally begin to grow. The benefit for the borrower is the lack of ridged qualifications and fees. In most cases you are simply paying the agreed upon interest.

A Rare Event

The last option is quite rare but it can happen. In some cases the buyer actually has the cash to purchase the property that they want. This is not really an option for too many buyers but there are a few who can make it happen. But in most cases, purchasing a commercial property will require some research and a loan application process to secure the funding that you need.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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