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How to Make Money in Commercial Real Estate

When it comes to investing wealth, real estate has proven itself time and time again to be a reliable way to make money. With $32.6 trillion up for grabs globally, many are turning to commercial real estate to bolster their investment portfolios. If you want to try your hand in commercial real estate, here are a few ways to enter the market.

Become a Broker

One of the ways to make money in commercial real estate is to become a broker and help developers and investors find the perfect properties to suit their needs. While this bears some similarity to residential realtors, it is significantly more involved.

In residential real estate, clients are looking for one thing: a place to live. A commercial real estate broker’s clients will be looking for unique elements that suit their business or investment needs, including:

  • Parking
  • Proximity to public transportation
  • Highway access for commuters
  • Storage space
  • Foot traffic (for retail spaces)
  • Space to grow
  • And more

Once you find the right property, commercial mortgage brokers will also need to help developers or investors identify and secure funding for their projects by working with different financial entities. Like residential real estate loans, commercial real estate loans come in many shapes and sizes. You’ll need to learn about all the different ways to secure funding and help clients navigate the commercial real estate financing process.

It might sound like a lot to juggle, but if you can do it, you can easily make over $100,000 per year—with some brokers reaching seven figures annually! Of course, commercial real estate brokers work on commission, so don’t expect to make much in your first few years as you build your reputation.

Invest in Commercial Real Estate

If the commission life isn’t for you, commercial real estate investment is another great way to earn money. Two of the most popular ways to invest in commercial real estate are::

  1. Buy a property, make improvements, and sell for a profit 
  2. Buy a property and rent it to tenants 

Real estate investing has the potential to generate a strong stream of income if you’re able to capitalize on market trends. Of course, there’s also plenty of risk involved, so make sure you do your research before applying for a loan and purchasing your first commercial property.

Work as a Commercial Real Estate Developer

Becoming a commercial real estate developer might take the most time and capital, but it has the potential to generate the most return on your investment.

Commercial real estate development is like starting from the ground up—quite literally. A developer buys a plot of land, builds a commercial property, and either sells it or rents it to tenants for income. Because you’re not buying an existing property, you can make it into whatever you need it to be to suit local business trends. Plus, brand-new buildings can typically be rented out for more money!

Since you are starting from scratch, commercial real estate development takes a bit more effort (and capital) to get started. Luckily, there are plenty of financial institutions that offer loan programs for each phase of the development process:

  • Construction loans
  • Land development loans
  • Bridge loans
  • Rehab or redevelopment loans

On average, commercial real estate developers earn around $80,000 annually, but that number can increase drastically depending on the real estate market and the choices you make. Many successful commercial real estate developers earn annual salaries in the millions of dollars.

Start Your Commercial Real Estate Journey

Are you ready to start your exciting journey in the commercial real estate market? No matter which path you take, it’s important to have enough capital to fund your business.

At Broadmark Realty Capital, we specialize in construction loans designed to suit the needs of commercial real estate investors and developers. With flexible loan terms and ample experience, we can get you the funds you need quickly, so you can capitalize on the next opportunity. Contact us and get your next commercial real estate project off the ground in no time.

What are the requirements for a commercial construction loan?

What are the requirements for a commercial construction loan?

A construction loan is a type of short-term financing to fund a new construction project. If you’re planning to construct a multi-family home, apartment building, high-rise, commercial office building, or another type of large project, you will probably consider obtaining a commercial construction loan.

Commercial construction loans are different from other loans. Most loans are structured so the borrower receives the full amount they are requesting upfront. Then, once the loan is received, the borrower makes payments over a set period of time.

However, with construction loans, the borrower does not receive the full amount upfront. Instead, you’ll work with the lender to create what is known as a draw schedule. This means that you will receive payments from the lender as your project hits new milestones. For example, the first draw might be used for the clearing and developing the land. The next draw you receive may be provided when the foundation is poured and another when the framing is complete, and so on.

construction loan

Typically, a lender will require a confirmation from an inspector that your project has hit each new milestone before releasing the next draw. This process will continue until all milestones have been completed and you have received the full amount.

When you take out a construction loan, you will only pay interest on the portion of the loan proceeds that you have received. Therefore, if the total loan amount is $600,000, but the lender has only lent you $150,000, you will pay interest on the $150,000.

Once the project is done and the full amount is due, what should you do next? Instead of making one large payment, you can look into a commercial mortgage. The property will likely serve as collateral for the mortgage, and you can use the lump sum from the mortgage to pay off the commercial construction loan.

Commercial construction loan process

1. Connect with a lender
Contact a hard money lender or traditional lender to discuss your project and find out what financing guidelines and solutions they have.

2. Commercial construction loan underwriting
After you submit your loan application, the lender will quickly evaluate the application internally to make a decision on whether or not to proceed. During this review, the lender is looking at the project cost, summary projections, underlying assumptions, and background of the developers. If the project is one the lender would like to move forward with, they will sometimes provide you with a loan term sheet. The term sheet typically outlines the terms and conditions of the loan, provided all the information that was provided is accurate and reasonable. Once the term sheet has been reviewed and accepted, the lender will move to full underwriting and approval of the proposed loan.

During the underwriting process, the lender compiles more detailed information about the project. Expect the lender to request building plans, general contractors’ bids, cost projections, construction timelines, etc. It’s also typical for a lender to ask for the borrowers’ tax returns, financial statements, and any other documents that can support the loan request.

One of the biggest differences between a commercial construction loan and investment real estate loan, from an underwriting standpoint, is that a construction loan has no operating history to underwrite. Therefore, the valuation of the property is only based on the real estate pro forma. As for the credit approval process, it’s similar to other commercial loans, but due to the extra risks involved, the development team, general contractor, and market conditions are all reviewed in more depth.

After the loan has been approved, the lender will provide a commitment letter. This is similar to the term sheet but is a legally binding contract, whereas the term sheet is non-binding.

3. Loan agreement and closing
Once you’ve committed, you’ll be provided with a closing checklist which outlines in detail what needs to be completed prior to the loan closing and funding to begin. As mentioned, additional funds are distributed on based on a draw schedule for the costs incurred in each stage.

Typical construction loan rates and requirements

Interest rates and fees vary greatly but generally increase as a direct correlation to leverage or risk. The higher the leverage or risk to the lender, the higher the cost to the borrower. Factors such as borrower creditworthiness, liquidity, and experience, also play into the cost of capital.

  • Conventional Lenders:
    • 3 – 6% interest
    • Fund 50 – 75% of project cost (“Loan-to-cost” or “LTC”)
    • 60 – 90-days to fund, typically
    • Strict financial, experience, and credit requirements, underwrite covenants, and prepayment penalties
    • Usually have additional deposit requirements and concentration limits for markets and asset classes, or for particular borrowers
    • Modifying or changing construction loan terms mid-way through with a traditional lender can be difficult or impossible
  • Private and hard money lenders:
    • 7 – 14% interest
    • 75 – 90%+ LTC, requiring much less cash at closing (“down payments”) to fund than conventional lenders
      • Broadmark Realty Capital, for example, will typically fund between 80 – 90% of project costs and can use the land as equity
    • Much more relaxed liquidity, net worth, experience, and credit requirements
    • 15 – 60-days to fund, typically
      • Broadmark Realty Capital, for example, is able to close within 1-2 weeks on most project types from the time appraisal is received (larger loans may take longer)
    • No deposit requirements and will rarely have covenants
      • Broadmark Realty Capital, for example, rarely underwrites covenants or prepayment penalties and has no deposit requirements

While conventional lenders may have lower interest rates, they also have lower leverage (requiring you to have more cash and equity), more difficult and longer approval and closing processes, and strings attached. Private and hard money lenders have higher interest rates but lend more towards the project’s costs, requiring you to contribute less cash upfront, making loans easier to qualify, faster to close, and have fewer strings attached.

Types of commercial construction loans

There are a few different scenarios in which developers and investors can use commercial construction financing solutions. These include land development, vertical construction, and acquisition and development projects.

Conclusion

Commercial construction loans can become complex and tough to secure. However, understanding how they are evaluated by lenders can help clarify the funding process. Broadmark Realty Capital has specialized in commercial construction loans and real estate development loans since 2010. Whether you’re looking for financing or have questions, call one of our loan specialists today!

How the Commercial Real Estate Lending Environment Might Differ in a Post-COVID-19 World

How the Commercial Real Estate Lending Environment Might Differ in a Post-COVID-19 World

It goes without saying that the global toll of the COVID-19 pandemic has been substantial. Like many other industries, the real estate lending sector has also been impacted. However, the market is still functioning, and investors still have access to financing. But how that funding is accessed, as well as the terms and structures of loan packages, have changed slightly to reflect the new environment. In this article, we’ll explain what investors should be aware of and how construction lending can evolve as the nation recovers from the pandemic.

hard money lending

Americans on the move: How some multifamily and single-family markets have changed

The pandemic has allowed many residents living in high tax and cost-of-living areas to move to locations that are less-densely populated and have cheaper costs of living. John Burns Real Estate Consulting found in a recent survey that 59 percent of new single-family rental tenants are relocating from urban locations, with 41 percent of new tenants moving from other suburban locations. Only 32 percent of new single-family tenants moved from apartments, meaning single-family homes are not enticing apartment renters to transition to detached houses or townhomes in large numbers. Instead, renters are benefiting from what they likely perceive to be more livable locations.

The 2020 U.S. Moving Migration Patterns Report from North American Moving Services shows Illinois, New York, California, New Jersey, and Maryland to be the top five states that people left. The most popular states for in-migration were Idaho, Arizona, South Carolina, Tennessee, and North Carolina.

Idaho led with inbound movers in 2020, as 70 percent of its population was moving in and 30 percent moving out, followed by Arizona with 64 percent inbound and 36 percent outbound. Tennessee and South Carolina both had 63 percent moving in and 37 percent moving out, while North Carolina had 61 percent inbound and 39 percent outbound.

Rounding out the top eight states for inbound movers were Florida, Texas, and Utah. Phoenix, Houston, Dallas, Atlanta, and Denver were the cities with the most inbound movers.

Suburban locations will play vital roles in the success of single-family rentals moving forward, including build-for-rent (BFR) communities, which are typically groups of single-family homes that benefit from the professional management and amenities of a full community. BFR communities are usually located near hospitals, military bases, and job centers with great walkability.

How private money lenders have navigated the lending market

Private money lenders have approached the recovering market in new and different ways. Some pressed pause on transactions initially to focus on their current portfolios, while others continued to fund new projects. Those that continued to lend may have made adjustments to their loan guidelines. These changes could have included:

  • Reduced loan-to-value (LTV) ratios; the industry average LTV ratio was around 70% before the pandemic and has now dropped to approximately 65%
  • Removal of at-risk property types from deal pipelines, such as retail and hospitality
  • Addition of more resilient property types to deal pipelines, such as residential and multifamily
  • Requiring or increasing interest reserves
  • Working with more experienced borrowers with higher levels of liquidity

There is also a group of lenders that are choosing not to make any adjustments to how they structure their financing packages. They’ve continued with business as usual, enduring the delays and adjusting for possible new market risks.

How traditional lenders navigated the lending market

Mortgage financing availability was firmly tightened at the onset of the pandemic and at one point reached its lowest level since December 2014. This tightening was driven by most lenders removing their products’ availability to borrowers with low credit scores and high LTV ratios. In addition to the adjustments to LTVs, maximum loan amounts have decreased across the industry.

Lenders like government-sponsored enterprises Fannie Mae and Freddie Mac have cut their lending volumes and made their underwriting more conservative. Importantly, they have instituted reserve requirements that require borrowers to put money in escrow for 9 to 12 months to cover future payments. In the past, they have financed up to 80 percent of a purchase price without reserves. This generally allowed real estate investors to acquire an asset with as little as 20 percent down.

Conclusion

Unlike traditional lenders who have strict regulations, private money lenders are nimble and can quickly pivot to meet changing market demands and unique circumstances. This has been more apparent throughout the pandemic, an event that has forced many lenders to adjust to an unexpected environment and which may result in some mitigation measures continuing into the near future.

With the speed and guidance of experienced and trusted lenders, commercial real estate developers and investors can continue to move forward and succeed, even in the midst of a market downturn.

 

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation, or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one of our lending experts today.

Broadmark Realty Capital lends in Denver, Florida, Georgia, Idaho, Maryland, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Washington D.C., and Wyoming.

4 Ways to Ensure Your Hard Money Loan Closes Quickly

4 Ways to Ensure Your Hard Money Loan Closes Quickly

A hard money loan can be a good option for a variety of reasons. For example, if you’re having trouble getting a loan from a bank with the terms you need, you need quick approvals and/or funding, you’re looking for tailored loan solutions, and/or you don’t want to bring in an equity partner.

Now, let’s talk about what you should know before looking for a hard money loan, and ways you can ensure a quick and easy loan process.

Quick loan application for construction funding

Know which loan type is right for you.

You can get a hard money loan on most property types, including single-family homes, multi-family, commercial, land, and industrial.

Some lenders specialize in just one or two loan categories; therefore, we recommend asking lenders upfront about what property types they are willing and able to fund. Most hard money lenders will not lend on owner-occupied properties, for instance, because of extra rules and regulations. This means lenders may not fulfill your loan request if you plan to reside in the property.

It’s also important to understand which loan type is best for your project. If you’re looking for a loan to assist with the purchase of development-ready raw land or for improvements to existing buildings or infrastructure, an acquisition and development (A&D) loan would be best. For raw land that needs to be made construction-ready, or for soft costs and entitlements, you should seek a land development loan. Construction loans are best when you’re looking to cover the cost of building various real estate projects. The recommended loan for major renovations to your property is a redevelopment/heavy rehab loan.

Understand hard money loan interest rates and points.

Most lenders charge both interest and upfront or exit points on the loan. You can expect bank loan points to range from 2 to 10 percent of the total loan amount; the exact cost depends on your specific situation as the borrower as well as the lender’s guidelines.

Compared to a bank, hard money lenders take on more financial risk with the loans they originate. Due to this increased risk, private money interest rates are often higher. This means that hard money lenders may be more expensive than banks; interest rates for hard money loans range from 9 to 18 percent. These rates will vary depending on the lender and region in which you’re operating.

It’s important to remember, however, that while hard money loans may be more expensive than a bank, they are less expensive than bringing in a new equity partner. In many situations, an equity partner can take upwards of 50 percent of the profit, which is well above a lender’s interest rate.

Calculate your Loan-to-Value (LTV) ratio

calculating loan to value ratio

A loan-to-value (LTV) ratio is what lenders use to determine the risk they’re taking on. You can calculate your LTV by dividing the loan amount by the value of the asset, and then multiplying by 100.

LTV = (Amount owed on the loan ÷ Appraised value of asset) × 100

Most hard money lenders will lend up to around 65% LTV or property value. There are some lenders, however, that will lend on after repair value (ARV) which is the estimated value of the property after it has been improved. This could increase your interest rate and/or points because it also increases the lender’s risk on the loan.

Be prepared with the necessary documentation.

Most hard money lenders are more concerned with the amount of equity you have in the property, versus, let’s say, your credit score. Lenders focus on the equity and property value as a whole.

Hard money lenders are also concerned with how you ultimately intend to pay off the loan. Be prepared to provide lenders with your exit strategy.  We recommend having a few backup plans that could be easily implemented if needed.

Banks typically want a large amount of documentation and paperwork. Hard money lenders, on the other hand, usually require much lighter documentation.

So, what types of documents are needed? Documents include, but are not limited to:

  • Loan application
  • Purchase contract
    • As with any type of loan, a Purchase and Sale Agreement is required. If the property is being refinanced, a payoff statement showing the outstanding loan balance can be required.
  • Preliminary title report
    • To show a clear title to the property.
  • Credit report
    • Impacts whether you’re approved and the rates and terms you will receive.
  • Most recent tax returns
    • Proof of funds to ensure your debt-to-income ratio remains below a certain level.
  • Proof of insurance
    • For any property being purchased or refinanced.

For construction/development loans, lenders would also need:

  • Itemized budget
  • Building permits
  • Building plans, specs, and architectural renderings
  • Name of the licensed contractor
  • Contractor agreement inclusive of a completion guarantee

Hopefully, this article has prepared you with the knowledge and confidence needed to consider a hard money loan to fund your next project quickly and efficiently. Higher interest rates may seem overwhelming at first, but the benefits of flexible loan structures, higher LTVs, and getting a loan funded quickly can far outweigh the extra cost.

 

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation, or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one of our lending experts today.

Broadmark Realty Capital lends in Denver, Florida, Georgia, Idaho, Maryland, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Washington D.C., and Wyoming.

4 Qualities To Look For In A Private Lender

When looking to fund a commercial project, bank loans are a slow and painful process. This is why many people turn to private lenders instead. The loans are approved much more quickly, they’re willing to take on riskier projects due to the asset-based lending format, and you get to build a working relationship with your lender to make future dealings much faster.

However, finding a private lender isn’t as simple as contacting your local bank. In order to help you find the right private lender, we’ve put together five qualities that you should be looking out for when you want to find the right private lender for your needs.

   1. The lender offers you flexibility

If a lender is not willing to negotiate the terms of your hard money loan, then they’re likely not someone you want to deal with. Private money loans are known for being flexible with repayment terms, collateral and generally any variable that could be changed. Without this flexibility, it’s not much different to a regular loan from a bank.

  2. The lender is willing to communicate

Private lenders should be treated differently than your regular bank lender. They should be far more responsive to your questions and concerns and they should be able to provide you with detailed answers to any concerns that you might have. Some lenders also make great advisors because they have experience working with commercial clients, so don’t neglect the importance of a lender that is willing to communicate.

  3. The lender has a good reputation

If you’ve been recommended to a private lender by a friend or mentor, then it’s already a good sign that they have a good reputation. However, it’s never a bad idea to ask around in order to verify that the lender you’ve picked is a good choice. Reputation is important when it comes to large sums of money.

  4. The lender has competitive interest rates

It should be clear that one of the minor problems with private lenders is that their interests are usually a little higher in order to compensate for the shorter loan terms. However, you can still find competitive interest rates with private lenders, and it’s a good idea to be in contact with several lenders so you can compare their rates.

 

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one our lending experts today.

How To Prepare For A Construction Bridge Loan

Construction bridge loans are a fantastic way to piece together two of your property investments. However, preparing for one can be a confusing and stressful time, especially with all of the other commitments you may have to your current property. To help you get ready for a construction bridge loan, we’ve prepared this simple list of tasks to complete before you apply.

Cash Reserve

Construction bridge loan lenders will typically require you to have sufficient cash reserves to cover certain contingencies. They may also require you to withhold a certain amount of your loan as an interest reserve rate.

Experience

You will be required to show a resume or portfolio of past properties that you have worked on. You have a much higher chance of being approved if your planned project is similar in nature to something you have worked on in the past. Your level of experience will have an impact on how much money you can borrow, the cost of originations and the amount of money you’ll be asked to hold in reserve. If you have no experience with the project you’re planning, then there’s virtually no chance of the loan being accepted.

Net Worth

Construction bridge loans typically don’t exceed the net worth of the borrower. When you apply for bridge financing, it’s important to provide financial statements to prove your net worth. The lender will use these documents to determine how much money they’re willing to offer you for a bridge loan. If several individuals are applying, then lenders will determine a collective net worth of all applicants.

Debt Service Coverage Ratio (DSCR)

An important qualifier for a bridge loan is your ability to handle the debt obligation, calculated using the debt service coverage ratio. The ratio measures the net operating income (NOI) of the property. This is calculated from the total gross income from rent, insurance, utilities, maintenance and so on. The NOI must be sufficient to cover the annual carrying costs for the financing. This is usually expressed in ratios such as 1.00, 1.25 and so on. Most lenders will require a ratio of 1.10 to 1.25.

Credit Score

Your credit score itself doesn’t play a huge part in your ability to take out a loan. Instead, it used to verify that refinancing your bridge loan with permanent financing is a viable exit strategy should you fail your project. It’s nowhere near as big of a factor as your net worth or DSCR, but it’s still a requirement to be accepted in the first place.

 

Interested in a construction bridge loan? Contact Broadmark today to learn about our array of bridge financing options.