Learn How to Finance Your Investment Real Estate
Real estate is one of the most profitable investments you can make. The downside when getting started, however, is the high cost of purchasing property. Almost everyone who buys a commercial investment property needs financing. We’ll look at the best ways to finance each type of investment real estate.
Types of Investment Real Estate
Investment real estate breaks down into two simple categories: Residential and Commercial. Residential real estate, is a property that will be rented as a home, as opposed to a business. These can be single-family houses, or multi-family units such as duplexes or apartments.
Commercial real estate properties are rented to businesses, and typically fall into one of four subsets: offices, retail, industrial, and special purpose (which are built by the investor). Offices break down further into three more categories: Class A office buildings which are either new or have been recently renovated, Class B office buildings, which need minor upgrades and/or repairs, or Class C office buildings, which are “fixer-uppers” that require extensive repairs and are used for redevelopment.
Residential Investment Property Loans
Residential and commercial real estate loans have many similarities, but one major difference. Since the goal of investing in a residential property is straightforward, you are not typically required to present a business plan. It’s impossible to obtain a commercial property loan without one. Other than that, the basic requirements and structures are very close. You must have good credit, and you will use the property itself as collateral.
Commercial Investment Property Loans
Since the types of commercial real estate are more varied, and business plans are more complex, more is required to obtain one. As we already mentioned, you must have a business plan. You must understand what type of property it is, and show how you plan to use it. You must also have a down payment.
Both types of properties can be financed by either bank loans or private loans, such as balloon mortgages and mortgage refinancing. Bank loans are generally more attractive, but harder to come by, especially for residential properties, as they are a greater risk, since vacancy for any period hurts cash flow. Private loans may have higher rates or longer terms, but can work out better in the long run. For commercial real estate, especially class 1 offices with full occupancy, are more likely to receive a bank loan as they are seen as a safer investment.