Which Commercial Lender Is Best For You? By Tony Seruga, Yolanda Seruga And Yolanda Bishop At Isnare.com Ezine Articles

Financing your commercial real estate investment is one of the critical pieces of the puzzle to becoming a commercial real estate investor. Sources for funding fall into certain categories, explained below. Each of them has benefits and trade offs, though they run the gamut in general desirability more or less from top to bottom here.

The first source of commercial real estate funding is the portfolio investor, one that represents an investment group that intends to hold on to that debt for as long as possible, and uses several of them as an income stream for their core business. The classic example of a portfolio investor is a traditional savings and investment bank, or a savings and loan office; in commercial real estate, the other major category of portfolio investor, and one that provides almost 30% of the investment capital in the market, is the insurance company or retirement portfolio. This type of investor wants something that's low risk but slightly higher yield than treasury bills, because what they're looking for is stability, not growth. From your perspective as a commercial real estate investor, the primary advantage is that they charge low interest rates. The drawbacks are that the process of securing these loans takes a very long time – minimum of two months, and six to nine months is much more common. The secondary drawback is that they tend to have a much lower cap on how much money they'll invest.

A similar category to commercial real estate investing is the federally backed commercial development loans, and HUD loans for developing rental properties. These loans are also at low rates, and if you qualify, they're great. However, the requirements to get them can get positively arcane.

The next category out for loan sources are commercial managed backed securities, or CMBS loans. These are an outgrowth of the savings and loan meltdown of the mid '80s, and provide a way to funnel financial institution funds into the commercial real estate and development market; these loans typically have higher limits, and an easier application process, but are going to run higher interest rates as well; one segment of this type of derivative product, the "sub prime" mortgage backed security, is the root cause of the housing collapse we're undergoing right now. CMBS loans also have a distressing tendency to be sold to other investors, meaning that the terms of your loan can become subtly altered over the course of the deal.

The last major category of lender is the so-called "Hard money" lender. This is a lender who's lending from their personal assets, or the assets of a group of investors. These loans can be very flexible, and they'll fund development projects that institutional or portfolio investors wouldn't touch with a ten-foot pole. On the down side, they will charge you a pretty premium in interest to make things happen, and may demand some input into the development itself. If you don't mind a bit of investment partner elbow joggling, it can be worth it.

With these types of lenders listed, ask yourself what kind of development you're going to be doing. The lower the risk factors, the higher on this list you can go, and the lower your interest rates will be – but also, the smaller the loan you can acquire. Keep these factors in mind when comparing funding sources for your property development dreams.

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