Understanding the Different Types of Commercial Real Estate Loans
Investing in commercial real estate can be a great way to diversify and grow your portfolio, but before you can do so, you’ll need to understand the different types of commercial real estate loans available. Knowing the types of loans out there can help you make the best decision for your investment needs.
The four main types of commercial real estate loans are:
1. Bridge Loans
Bridge loans are short-term loans that are used to secure capital while waiting for more long-term financing options. These are typically used when an investor is negotiating a larger loan and needs immediate capital to cover costs until longer-term financing is secured.
Bridge loan terms range from one to two years, and interest rates can range from 7% to 12%.
2. Permanent Loans
Permanent loans are longer-term loans that are typically used for larger investments such as buying large properties or multiple properties at once. These may also include refinancing existing mortgages or consolidating debts. Interest rates on permanent loans vary between 4% and 6%.
3. Construction Loans
Construction loans are short-term financing options for projects such as new building construction, renovations, or improvements made to existing properties. The loan amount provided depends on the cost of the project and is usually repaid within one year after the completion of construction. Interest rates on construction loans can range from 8% to 14%.
4. Mezzanine Financing
Mezzanine financing is a type of debt financing that is typically used by companies in need of additional capital for expansion or other large projects but doesn’t qualify for traditional bank financing due to its size or lack of financial history. This type of loan has higher interest rates (8% – 18%) since it is considered riskier than traditional bank lending and requires more collateral than other forms of financing.
Conclusion:
Commercial real estate investing can be an excellent way to diversify your portfolio and increase your income potential, but it’s important to understand all the different types of commercial real estate loans available before making any decisions about which route works best for you financially. We hope this breakdown helps provide some clarity on these various loan options so that you can make an informed decision about which type will work best for your investment goals!
