Want to get into commercial real estate but nervous about the astronomical upfront costs? The good part is that there are creative ways to finance buying commercial properties without all that monstrous capital upfront. In this post, we’ll take a look at some creative ways to fund commercial real estate investments that are flexible, easy to access, and, in fact, creative. Let’s dive in.
Table of Contents
1. Seller Financing: Buy from the Owner, Not the Bank
Seller financing means you don’t have to go through the bank. You can pay the seller of the property, who becomes the lender; therefore, you can make payments to the seller directly. Investors with no financing options or those with high-risk properties can especially benefit from this.
- Pros: Lower down payments, potentially more favorable interest rates, and easier loan qualification.
- Cons: Often, you’ll pay a higher interest rate than traditional loans, and terms may be shorter.
2. Mezzanine Financing: Adding a Layer of Financing
If you need extra capital, mezzanine financing might be a good fit. It’s a loan that sits between traditional debt (like a mortgage) and equity (your ownership). It’s secured by your stake in the property or business rather than the property itself.
In a mezzanine financing deal, the lender provides a loan secured by the borrower’s ownership of the property or business rather than the property itself. If the borrower defaults, the lender can convert the debt into an ownership stake, making it less risky for the lender and allowing the investor to acquire the needed funds with fewer strings attached.
- Pros: Flexibility to secure larger loans, enabling you to close deals faster.
- Cons: Higher interest rates due to the additional risk for lenders.
3. Crowdfunding: Pool Resources from Many Investors
Many investors can contribute small amounts to big commercial projects on crowdfunding platforms. What’s more, is that this method democratizes investment by allowing people to invest without buying an entire property.
- Pros: Lower entry costs, greater accessibility, and fractional ownership.
- Cons: Limited control over management and decision-making on the property.
4. Lease Option Agreements: Try Before You Buy
A lease option agreement is when you lease the property with an option to buy it at a price you agree on later. Your rent payment may even contribute to your purchase price, enabling you to test the earning power of the property.
- Pros: Low initial investment with the flexibility to buy in the future.
- Cons: Fees for the option and typically higher rental rates.
5. Bridge Loans: Short-Term Financing for Fast Deals
Bridge loans are short-term loans that allow the buyer to purchase the property quickly when they need cash on hand. Such loans help the borrower secure long-term financing for commercial real estate investment.
- Pros: Fast approval and funding, ideal for time-sensitive investments.
- Cons: Higher interest rates and shorter terms than traditional loans.
6. Private Equity Partnerships: Team Up for Big Investments
Investors looking to buy high-value commercial properties but don’t want to foot the bill on their own can look to private equity partnerships for a financing option. A private equity partnership is where a large number of investors partner together to buy and manage a property platform collectively. With this plan, you take on major projects with less risk to you as an individual while gaining the opportunity to tap into the resources and expertise of others.
- Pros: Access to high-value properties, shared financial burden.
- Cons: Shared profits and decision-making.
7. Opportunity Zone Investments: Tax-Friendly Financing
Commercial real estate investors can earn tax breaks as well as invest in underserved areas through Opportunity Zone investments. These Opportunity Zones were created by the Tax Cuts and Jobs Act of 2017, to encourage investment in economically disadvantaged communities and offer tax benefits to those holding their investments for a certain period. With the tax benefits, this is the perfect way for investors who want to take advantage of real estate growth while taking significant write-offs.
- Pros: Tax benefits and potential appreciation in up-and-coming areas.
- Cons: Often in riskier locations with slower property value appreciation.
Conclusion
Creative financing opens the door to commercial real estate investing by offering alternatives to traditional loans. Each option comes with its own benefits and risks, so carefully consider which strategy aligns best with your goals, risk tolerance, and investment style. By leveraging innovative financing, you can pursue commercial real estate opportunities that may have seemed out of reach.
