In today’s financial market, it’s important to be aware of the various types of loans that are available for commercial real estate (CRE) purchases. There is no longer one single go-to form of financing; what works well for one deal may not work at all for another. Understanding your options will help you to choose the one that will provide the best return on your investment.

Traditional Bank Purchase CRE Loans:

The financing offered by banks and other institutions is the traditional mortgage that most people think of when trying to fund a CRE investment. This type of debt is typically cheaper with healthy leverage. However, this type of loan also has some distinct disadvantages for investors. Traditional lenders typically determine loan amounts using the lesser of either the purchase price or the appraised value of a property. For investors interested in rehabbing distressed properties, this can mean significantly lower loan amounts from banks than other avenues of lending. Additionally, these traditional lenders also have very strict lending requirements based on the borrower’s credit history, global debt, and cash flow, rather than the value of the property securing the loan. Banks can also take months to underwrite loans, making it difficult for borrowers to act immediately on good deals they come across.

Life Company Loans:

Commercial real estate loans from a Life Insurance Company of less than $5 million are extremely difficult to obtain.  Life companies often limit their loan amounts to less than 60% loan to value and don’t often allow second mortgage loans behind their first.

Lines of Credit:

If you have credit and equity built up, a line of credit can be fast and flexible option to expand your real estate portfolio. The only downsides are that you can only borrow as much as you’ve put in and that your lender can pull access to it at his or her discretion.

Hard Money (or Private Capital) Loans:

Hard money loans are similar to traditional loans, except that they are underwritten by private lenders who are free from the restrictions that rein in institutional lenders. While hard money lenders may ask for much of the same financial documents and information that a bank does, their focus is on the value of the property, which is why these loans are also referred to as asset-based or private money loans. Although they typically charge higher interest rates and origination fees, these costs are often offset by the speed and flexibility with which they can approve and close a loan.