What Is Real Estate Financing?

Commercial real estate can be incredibly valuable whether you’re a property investor or a business owner. Property investors use real estate to generate profit, either by selling it or collecting rent. Business owners can use real estate to open new locations and expand their business.

No matter what your plans, the first step is to acquire the property. However, this can be incredibly expensive and most people don’t have the total sum saved up. The good news is, you can apply for commercial real estate financing.

Who Provides Financing for Property Purchases?

There are many ways to obtain funding for a property purchase, but the most common option is to apply to a lender. There are traditional lenders, such as banks and credit unions, and alternative lenders, which are private lending companies.

Traditional Lenders

When you think of a loan, you probably envision a bank or credit union. These financial institutions offer mortgages and other types of loans for the purpose of purchasing and rehabilitating properties. The approval process can be very slow because they’re required to look at your credit history, debt-to-income ratio and myriad other factors before they give an answer. While traditional lenders can work well for business owners to plan to stay in a location for decades, they don’t offer the flexibility and speed that property investors typically need.

Alternative Lenders

Also called private money or hard money lenders, alternative lenders aren’t limited by the same criteria as banks and credit unions. This lets them offer a wider variety of financial products and cut down on paperwork. The result is approval in a matter of days instead of weeks. In fact, some lenders can even give you cash in as little as 24 hours.

It may also be easier to qualify depending on the loan, as some forms of financing focus less on your credit history and more on the value of the collateral. This means you may be able to get a loan even if you have less-than-ideal credit.

Alternative lenders also offer short-term loans that work well for property investors. For example, bridge loans usually last two years or less, ensuring that investors won’t be tied up with payments for 30 years.

So which type of lender should you go with? It really depends on what you value. If you need fast approval to jump on a business opportunities, you may benefit from applying to an alternative lender. If you want lower interest rates and long loan terms, you may be better off with a traditional lender.