Anyone trying to convince you that you can earn cash from completely passive investments should make you suspicious. Chances are they’re trying to get you to sign up for their online course or join an expensive but ultimately worthless program. The truth is that building a smart investment portfolio takes thought and strategy, research and experience. But, property investing can be made easier with advice and insights from qualified professionals. You might not know it yet, but commercial real estate financing can help.
Every successful property investor started small and scaled upwards. Whether you want to profit from a vacation property or invest in a retail center, you’ll probably need financing to get started. Your broker is a valuable source of expertise and experience essential to making the right moves, especially if you’re just getting started with your portfolio. In this article, we’ll cover some basics of using commercial real estate financing to build your investments. For tailored professional advice, reach out to your broker.
Second Home or Investment Property?
Looking to buy a second home or investment real estate? How you refer to a property makes a big difference, even if the building is the same. Buying a second home, however, is very different from buying an investment property. Here’s why:
Taxes: The IRS treats second homes and investment properties differently, changing how you report income from the property and what you can claim as deductions.
Lenders: Lenders look at the two types of properties differently when you’re applying for a loan. You’ll need to review their qualification criteria carefully.
Living: A second home is a property you live in for a certain part of the year, whereas you don’t need to occupy an investment property.
Size: Investment property can have more than one unit, like a duplex or apartment building. A second home is typically a single-family unit.
Insurance: The type of insurance you need is different for a second home vs. income property. Income property insurance covers you for tenant lawsuits or loss of rental income while second home insurance doesn’t.
Your broker can help you determine the type of financing you need and how to apply. We can also assist you in defining your goals and finding the best lender.
Why Choose a Commercial Loan?
If you own a home, you’re probably familiar with the residential loan process. So, it makes sense you’d think of doing the same when you’re ready to buy a new property. However, when you’re buying property to generate cash flow, you can gain multiple benefits from going with a commercial loan.
Flexibility: Commercial real estate lenders pivot faster than traditional residential mortgage lenders and accommodate a wider range of terms. They also close faster, helping you grab that ideal property first.
Qualification: Commercial loans can be based on the potential income of the property instead of your personal credit rating. However, lenders may still take your personal finances into account.
Opportunity: Once you get to four or more units, commercial property earning opportunities increase exponentially. Commercial loans let you purchase multiple properties under the same loan.
Scalability: The larger the investment, the higher the cash flow you can earn. A two-level apartment building will earn more than a duplex. A residential loan will restrict you to smaller properties.
Because they’re so flexible, there are a lot of options when it comes to commercial real estate financing. Your lender will show you the best-fit loans to help you meet your investment goals.
Match Property Types to Your Goals
A diverse portfolio balances risk and is more resistant to market fluctuations. If you already own single-family housing, consider retail space or mixed-use property as your next move. Make sure you’re matching the property type to your current investment goals. Your broker can help you assess the viability of an investment property based on what you want to achieve with your portfolio.
Vacation Properties: Vacation properties generate seasonal income, especially near beaches, ski resorts, and special events. They require active management, which is why you may choose to work with a management company or rental platform (AirBnB, Vrbo, etc.).
Asset-based loans (a.k.a. DSCR loans) are scalable and based on the earning potential of the property. Private lenders are often short-term rental investors themselves and understand the nature of the market better than others. They’re typically more flexible than traditional lenders. Discuss these options and more with your broker, who will give you feedback based on your personal investment goals.
Duplexes and Triplexes: Having multiple units in a property can offset vacancies and generate steadier income than a single-family or vacation property. They’re small enough to be handled by self-management or hired part-time management. Duplexes and triplexes can generate income throughout the year, depending on your lease terms.
Portfolio loans are popular with investors looking for custom terms or who don’t meet traditional lending criteria. Private loans are short-term loans that let you secure investments quickly and have more relaxed qualification requirements. Ask your broker if one is right for you.
Multifamily: Multifamily real estate normally has four to five units in a single property. At this stage, many investors choose to hire a management company. They’re ideal for investors who want consistent cash flow, risk diversification, and scalable growth.
USDA loans work well for properties in rural areas when you plan to live in one of the units. Commercial Mortgage-Backed Securities (CMBS) can be ideal for investors interested in non-recourse loans with larger amounts and lower interest rates. These are just a few of the options your broker can share with you.
Office: Investors can typically lease offices for much longer than multifamily properties, reducing vacancy rates and providing longer-term cash flow. They’re suitable for investors who want consistency and lower maintenance costs.
SBA 504 loans can be a good match for office investors who also own a small business. They provide fixed-rate financing, competitive rates, and low down payments if you’re sharing your office space with renters. Life insurance companies also finance real estate. They come with low rates and long terms but can be more difficult to qualify for. Ask your broker how they can help with your loan application.
Retail Center: Retail centers like strip malls and shopping centers can generate high cash flow, but need active management. Some retail leases allow you to earn a portion of your renters’ income. They’re often suitable for investors who want high income and don’t mind slower appreciation.
Bridge loans provide funding for acquisitions and renovation before an investor secures permanent financing. SBA 7(a) loans are flexible and low-interest, also providing working capital. Ask your broker how to qualify, even if you’ve been previously denied a commercial loan.
A well-chosen property not only produces income but also appreciates over time, helping investors build long-term wealth. Property values, appreciation rates, loan terms, and interest rates all vary based on the market, property class, property type, and location. A class A multifamily property near a tech hub, for example, might perform better than a class B multifamily by the beach. Engaging a qualified broker will help you make choices that grow equity in your portfolio.
