The high interest rate environment in the US since 2021 has led to a liquidity squeeze in the commercial real estate industry. Banks are more restrictive with CRE lending causing many CRE investors to struggle with illiquidity.
Knowing how to finance a commercial property in such an environment can give you an edge over other investors who have given up and sat on the sidelines.
In this article, we will consider other options you can explore outside of traditional banks.
U.S: Small Business Administration (SBA) loans
SBA 7(a) and 504 loans are options that CRE investors can explore.
With an SBA 7(a) loan, you can get up to $5 million repayable over up to 25 years from an SBA-affiliated lender. You can use this money to buy land and buildings, renovate existing properties, and construct brand-new buildings.
SBA 504 loans provide up to $30 million repayable over 25 years. They focus on small businesses seeking to purchase real estate assets for the sake of job creation and growth. You can also use them to purchase buildings, renovate an existing one, or construct from scratch.
In terms of usage, 504 loans are limited to commercial real estate or heavy machinery while 7(a) loans can still be used for working capital needs (pay creditors, refinance current debt, etc.).
Collateral and solid credit history are usually required for SBA loans.
Debt Service Coverage Ratio loans
These are loans that you can get without submitting proof of income, tax returns, or even employment details. The concern of the lender is the Debt Service Coverage Ratio (DSCR) – the ratio of your operating cash flow to the interest and principal payments.
Once your DSCR is equal to or greater than 1, these lenders will give you the loan. A DSCR greater than 1 assures them that you can afford the monthly repayments. You can raise to $3.5 million with these loans.
Bridge loans
A bridge loan provides short-term liquidity while you are searching for more permanent funding. These loans are usually payable within six months to three years.
Given that lenders are taking on more risk, the interest rate tends to be high. Lenders will usually request an excellent credit score and a downpayment which can be up to 20%. The property you want to purchase serves as the collateral.
The advantage which such loans is quick approval and an easy approval process.
Hard money loans
Hard money lenders are private individuals and businesses that offer short-term liquidity based on the value of the property you want to purchase (which will be the collateral) rather than credit scores or financial statements.
They are usually more accessible – with fast approvals and a seamless approval process – but all of that is compensated for with higher interest rates and down payments.
Online lenders
Online lenders are more accessible than traditional lenders – less stringent requirements and faster approvals. They also tend to look beyond credit scores when evaluating borrowers.
However, many of them will charge higher interest rates than banks.
Securing good faith deposits while waiting to finance the property
In today’s CRE market, buyers need to pay good faith (or earnest money) deposits before they can inspect a property or negotiate its terms.
While waiting to secure financing for a deal, you must pay good faith deposits in commercial real estate for the seller to know you are serious. If you don’t pay it, you will be surprised that the property is no longer available by the time you secure funding.
With a good faith deposit financing company like Duckfund, you can secure your place with the buyer while you work on securing finance for the property. You can complete an application for good faith deposits in 2 minutes (with no credit report) and get the funds transferred to an escrow in 48 hours.
More importantly, Duckfund will finance as many deals as you want, even concurrently. This allows you to explore multiple deals and build a profitable portfolio across all CRE types (industrial, multifamily, warehouse, retail, office space, data centers, film studies, etc.).
Wrapping Up
So, what’s the big takeaway here? Well, even though the commercial real estate world is going through a tough time with high interest rates and banks being stingy, there are still ways to get your hands on the cash you need. From SBA loans to online lenders, you’ve got options that can help you stay in the game while others are sitting on the bench.
But here’s the kicker: don’t forget about those good-faith deposits! They’re super important in today’s market. And with companies like Duckfund, you can lock down properties while you’re still figuring out the financing. This means you can keep exploring deals and building your portfolio, even when times are tough. So, don’t let the current market scare you off – with the right know-how and tools, you can still make moves in commercial real estate.
