In today’s investment market, there are many options to choose from. Many investors go down the traditional route by investing in stocks, bonds, and mutual funds. Increasingly many people are branching out and investing in assets with a little more flair, like cryptocurrency and commercial real estate (CRE).
Commercial real estate investment comes with certain benefits over more traditional investment options:
- Real estate is insulated from market fluctuations. As a long-term investment option, it is relatively stable and mostly has a consistent rate of return.
- It comes with a lock-in period safeguarding your investment while guaranteeing returns.
- Any special purpose CRE can be a literal gold mine as it will be well sought after by a niche segment of tenants, thus assuring that a renewal of the investment keeps giving returns as a passive income.
With consistent returns, a higher rental value, and passive income, it’s no wonder that commercial real estate has become an alluring opportunity for investors. Although there is some turbulence in the market due to external factors, the overall outlook for the industry remains positive. According to NAIOP, most CRE specialists have a favourable outlook for the near future, while investors remain optimistic for the fourth quarter. However, challenges lie ahead for those trying to invest in commercial real estate. In this guide, we cover the five most common challenges in commercial real estate financing and offer suggestions for overcoming them
1. Difficulty in Qualifying for a Loan
CRE loans exist to finance a property used for business-related purposes, such as shopping malls, warehouses, apartment complexes and office buildings. A CRE loan can be used to buy a new property, renovate existing income-producing property or refinance debt on a commercial property you already own. While investing in commercial realty can be done in an individual capacity, the high cost of investment makes it difficult for a single investor to invest the required amount in a commercial real estate entity.
Traditional lenders, such as banks, are usually hesitant to loan money for speculative real estate ventures. Instead, preferring funding projects that have already begun or are certain to be completed successfully. As a result, you may find it difficult to qualify for a commercial real estate loan from a bank. An experienced commercial mortgage broker can help you overcome this challenge by connecting you with alternative lenders more willing to invest in new projects. These types of lenders include private equity firms, hedge funds, and other investment firms.
2. High-Interest Rates
The current lending environment impacts commercial real estate transactions, specifically those pursuing national and international opportunities at lower cap rates. Investors who buy at lower cap rates, such as large retailers, are starting to feel the effects of rising interest rates on their investments. While cap rates have adjusted slightly in response to the recent interest rate increases, most traditional lenders are taking a more cautious approach to deal-making in late 2022. As lenders become more selective about which deals they will pursue, there is still plenty of capital available on the side-lines. However, it appears that industrial and multifamily real estate properties are weathering the changes better than other sectors of the commercial real estate market.
One reason industrial and multifamily properties are faring better than other types of commercial real estate is that they are typically less expensive to purchase and operate than office buildings or retail centres. In addition, their tenants tend to be less affected by economic downturns than businesses in other industries. For these reasons, investors looking for opportunities in the commercial real estate market should consider industrial and multifamily properties as a safe bet in an uncertain economic climate.
3. Limited Loan Options
Another challenge investors may face is that there are fewer financing options available. In the past, investors could get loans for the full purchase price of a property. However, today, most banks will only lend 60-70% of the purchase price. This leaves investors with a smaller pool of potential properties to choose from.
Traditional lenders, such as banks, offer a variety of loans, such as home equity lines of credit, construction loans, and so on, while alternative lenders tend to offer only one type of loan, typically referred to as a “hard money loan”. A hard money loan is a short-term loan secured by real estate collateral. To overcome this challenge, ensure you understand all the terms and conditions of the loan before signing any paperwork. You should also try to shop around and compare offers from different lenders to ensure you get the best deal possible.
4. Strict Loan Conditions
While hard money loans can provide much-needed financing for CRE investors, they also come with some strict conditions. For example, most hard money loans have a balloon payment, meaning that the borrower will be required to pay back the entire loan balance in one lump sum at the end of the loan term. This can be difficult for borrowers who do not have enough cash on hand or who cannot refinance the property within the given time frame. To overcome this challenge, try negotiating longer repayment terms or shorter balloon payment periods with your lender. Before signing any paperwork, you should try to shop around and compare offers from different lenders.
5 . Risk of Foreclosure
One final challenge you need to be aware of when taking out a hard money loan is that there is always the risk of foreclosure if you default on your payments. Hard money loans are typically collateralized by real estate property which the lender can repossess if borrowers fail to make their payments on time. To avoid this risk, make sure you carefully review all the terms and conditions of the loan before signing any paperwork and make sure you understand all of your obligations as a borrower. You should also negotiate longer repayment terms to have more time to repay the loan if necessary. If all else fails, remember that most hard money loans are short-term loans, so even if you end up losing your property through foreclosure, it will only be temporary.
Why should you work with Black Collie Capital?
When it comes to real estate, finding the right financing can be the difference between a project’s success or failure. At Black Collie Capital, we understand this better than anyone. We’ve been in the business for decades and have helped hundreds of clients secure over $900 million in funding. We believe that access to quality real estate financing should be available to everyone—not just a select few.
Black Collie Capital has built up an impressive network of funding sources over the years. This gives us the ability to find the best financing solution for your specific project needs—whether it’s traditional bank financing, private equity, or something else entirely. We’ll work with you to figure out what type of financing makes the most sense for your situation and then do everything we can to make it happen.
At Black Collie Capital, we don’t just see ourselves as a provider of financing—we see ourselves as a strategic partner in your project’s success. We’re here to help you every step of the way, from identifying potential funding sources to putting together a winning underwriting package. We want nothing more than to see your project succeed and will do everything in our power to make it happen.
If you’re looking for a strategic partner to help you with your real estate projects, look no further than Black Collie Capital. We have access to a wide variety of funding sources, are experts in underwriting and securing funding, and are committed to your success.
To find out more about our financing options, visit our website, or contact us today to learn more about how we can help you achieve your real estate goals!