Like many residential real estate investors, most commercial real estate investors seek outside financing. Although it would be great to be able to purchase these properties in cash, their prices often require investment or debt financing. If you are thinking about expanding your portfolio into commercial property investment, you should know a few things about debt financing.

Types of Lending

Commercial real estate has two primary types of lenders. First, some lenders will only look at their own balance sheet before determining whether to lend you money. Although you may get a lower rate, you may only receive 60% of your property value. These lenders include traditional banks and insurance companies. However, proceeds lenders are debt funds. This is where you will find alternative financing. Although their interest rates are higher, they may lend up to 80% of the property value.

Bank Financing Has Increased

After the market crash and recession in the early 2000s and the subsequent regulations that banks hold more cash to back their loans, many investors feared that bank financing would become more difficult. However, this has not happened. In fact, lending has actually increased rather than decreased. Foreign investments and low interest rates are key causes of increased lending practices. In addition, the rental market demand has significantly increased over the last decade.

However, many lenders have begun further diversifying their lending. This is great for new investors who are entering the market, but don’t expect your bank to lend to you every time you have a new property to purchase. Also, although they have plenty of capital, their lending standards have tightened. Don’t discount your bank though. These institutions can offer very competitive loan options.

Alternative Lenders Are Expanding

Not all loans must come from banks. Today, many alternative lenders are making names for themselves. These companies offer bridge and other loans that fill the void big banks leave when they offer commercial property financing. For example, they can loan you money on assets as you search for a more complete loan. Alternative lenders are especially involved in the construction, heavy transitional and mezzanine loan markets.

What Financiers Look For

Before you seek a loan, you should understand what your lenders are looking for. First, they will scrutinize your business finances to determine your likelihood and ability to repay the loan. Your net operating income and debt ratios are key factors. Your business credit will also be analyzed. However, your personal finances and credit will also be checked. Then, the bank will look over the features of the property to determine its value and income viability.

Commercial real estate presents an exciting investment opportunity. However, you need to do your research to ensure you have the best lender and loan to finance your project.