When you are preparing to purchase real estate, whether it is residential or commercial real estate, you should learn about all your financing options. Each type of loan has different advantages and disadvantages and is built for unique purposes. These are a few financing options you should know about.

Rental Property Financing

If you are new to real estate investing, you can choose to get a traditional mortgage on your first few properties. However, you must live in the home for at least a year. This does not mean that you cannot lease part of it out to others and earn rental income, but by staying in the home, you get much better loan terms. As your investments grow, you won’t be able to live in each home, which means that you need to investigate other financing options, such as commercial property financing. You may even earn the money or leverage your other properties in a way that will allow you to purchase new rentals in cash.

Resale Financing

Flipping houses has become a popular endeavor. However, these properties have very specific financing requirements. Even if you decide to live in the property during the renovation process, you may not qualify for a traditional mortgage. This is because you typically need to live in the home for at least a year, and the goal when you flip homes is to get them renovated and resold as quickly as possible, but always within less than a year. The quicker you flip the home, the lower your carrying costs, e.g., your mortgage payments and property taxes.

Every commercial loan requires origination fees, underwriting, appraisals, mortgage insurance and other fees. Therefore, your goal should be to eventually be able to purchase and renovate these homes with cash. However, initially, you may need to seek a hard money or term loan or other types of resale financing.

Financing Commercial Real Estate

If you plan to purchase commercial property, whether you intend to renovate and lease the space or set up your business in the space, you need a commercial property loan. You may even get better terms if you occupy up to 50% of the property and lease the rest. Commercial property is a major business asset, especially for a small business, so these investments are highly valuable.

Before financing commercial properties, investigate the neighborhood and traditional resale value of similar properties in the area. Then, speak with several financial institutions to find the best loan terms. Look into loans that have balloon payments or those with interest rate resets. However, carefully review their terms to ensure that you can make the payments over the long term. You may also qualify for SBA loans with lower interest rates and better terms.

Purchasing commercial real estate is exciting, but you need to do your research to find the best financing terms for your business.