Purchase real estate for investment is an excellent way to boost your portfolio, but before shopping around for deals it’s essential that you understand all of the available real estate loans.
Mortgages are one of the most frequently used loan types for financing real estate transactions. Backed by banks and other financial institutions, mortgages allow buyers to acquire homes with minimal upfront cost.
Commercial real estate (CRE) loans
Commercial real estate loans (CRE) provide business owners with an affordable and flexible way to buy, renovate or refinance commercial properties while taking advantage of potential tax benefits and building their credit profile.
Lenders consider the nature of collateral, creditworthiness of an entity or principals and financial ratios such as loan-to-value ratio and debt service coverage ratio when reviewing applications. Lenders also want three to five years’ of business statements and income tax returns before making their decision.
Commercial property loans are secured by a lien against the purchased property, meaning if you default on your loan your lender could seize and sell it off in order to recover their losses.
An average CRE loan typically requires a 20%-30% down payment with an LTV ratio between 65-95%. An experienced real estate broker can guide you through the process of securing commercial property loans while helping identify suitable lenders.
Residential real estate (RRE) loans
Residential Real Estate (RRE) loans are designed for the purchase, construction or renovation of single-family residences as well as investment properties that will generate income.
No matter if you are purchasing or investing in real estate, finding the appropriate loan type will help you meet your goals. Your decision may depend on a range of factors such as credit history and financial ratios.
Commercial real estate (CRE) loans are designed for the purchase, development or renovation of income-producing properties such as offices, retail outlets, hotels and apartments. Loans of this nature may be given out to investors such as corporations, developers, partnerships, funds trusts or real estate investment trusts (REITS).
Commercial loan interest rates typically surpass residential ones and often come with additional fees such as legal, loan application, survey and appraisal costs that can increase overall costs. Lenders will also require you to submit a debt service coverage ratio (DSCR) report as evidence that you can repay the loan using cash flow generated.
Homestyle renovation (HSR) loans
Homestyle Renovation (HSR) loans provide an efficient means to fund property improvement projects. By consolidating both mortgage payments and renovation expenses in one loan, HSRs make for easy financing of property improvement initiatives.
These products are excellent solutions for renovating homes or commercial properties that need repair and upgrades to meet current building code standards, such as room additions, new kitchens or bathrooms, landscaping improvements or pool installations.
As part of this process, the lender creates an escrow account where funds will be held until renovation work has been completed and then released back to the contractor upon satisfaction of work performed.
Renovating property to flip is a popular method for financing renovation costs, yet these deals may present risks to borrowers such as underestimating costs, supply chain disruptions, rising materials or construction labor shortages and real estate market dynamics.
Fix and flip (F&F) loans
Fix and flip loans are used by investors to acquire non-owner-occupied properties they intend to renovate and resell at a profit, considered riskier to finance due to these properties typically not being owner occupied and having lower collateral values than traditional home purchases and mortgages.
Fix and flip loans offer investors many different loan options that differ by way of interest rates, fees and qualifications.
Fix and flip loans require lenders to conduct an in-depth analysis of a borrower’s banking and buying history as well as prospective rehab costs and property’s current value. They may also consider factors like proof of funds or financial stability of applicants.
Fix and flip loans provide another advantage for novice investors looking to purchase property to renovate, as they don’t discriminate based on its condition. This is especially helpful for first-time investors who need financing in order to buy an attractive property and then get it renovated.