Commercial real estate investing is an exciting and potentially profitable enterprise. Under most circumstances, financing is key to obtaining properties. Understanding property funding will help significantly with making wise investment decisions. Here are some advantages and disadvantages of real estate financing that every investor should be aware of.

Real Estate Financing Advantages

Because properties are a form of collateral, it is typical that nothing further needs to be risked. If a lender has concerns prompted by an applicant’s shaky credit score, a personal guarantee or smaller form of additional collateral may be necessary. Since properties themselves provide a form of lender protection, real estate financing tends to have lower interest rates than traditional loans. Comparing commercial mortgage lenders against one another can help assure you pay the least amount possible.

When you own a property, you are able to apply for a home equity loan, although you may not have the right to do so if you use the house as your primary residence. Once your mortgage has been significantly paid down, these financial instruments can help assure that the remaining balance gets paid before it comes due. Because home equity loans are a secured form of financing, future high-interest rates may be avoided. 

Best of all, real estate loans typically are easy to apply for and are highly negotiable.

Real Estate Financing Disadvantages

Unfortunately, many types of loans available to homeowners are not permissible for locations engaged in business. A loan provided by the Federal Housing Administration, for instance, cannot be applied to properties devoted to commercial activities. Similarly, there are restrictions on what loans are available for spaces that are leased. Make sure that the loan you are considering properly matches your intentions.

Real estate loans often come with restrictions on early payments. Satisfying your financial obligation early may trigger a monetary penalty. Avoid paying these unnecessary and avoidable fees.

In the case of balloon payment loans, small teaser rates are followed by a single massive bill that suddenly comes due. This can be difficult to plan for and sometimes results in another loan being taken out to satisfy the terms of the original agreement. The other unsavory outcome is that the property is repossessed. Approach balloon loans with caution.

Commercial real estate financing comes with varying pros and cons. However, financial aid is usually necessary to make purchasing a property possible. Be aware of what you can expect from a real estate loan before signing any contract.