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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!

The Multiple Stages of Construction Financing

The Multiple Stages of Construction Financing

When you need to obtain financing for your real estate investment project, there are many factors to consider, whether you’re building a single-family home, acquiring raw land, or developing a multifamily property. In fact, each stage of the construction process can be financed separately, with each part of the process requiring capital to add value to the project. Regardless of whether you’re looking to sell a project for a profit or transition it into the next phase of its development, be sure to work with an experienced lender that is well-versed in the property type you’re working with.

In this article, we’ll explain the different stages of real estate development and how appropriate financing can add significant value to each one. Identifying these details upfront is a critical part of a real estate project that will be successful, regardless of the stage in which you choose to get involved.

stages of construction financing

Raw Land Loans

Purchasing raw land may be right for you if you want your project to be fully customized and you’re not concerned about taking some extra development time. You may want to purchase an infill lot in a dense, urban location, or land in a suburban area that can be platted into individual lots to build multiple structures. A land loan will allow you to purchase this piece of land on which to build your development.

A key factor to consider when examining the risks of purchasing land is the marketability of the land and how it will affect any future projects that will be built upon it. Some lenders consider themselves “land banks,” and specialize in funding the purchase of raw land before the profitability of a project can truly be determined, adding to the risk associated with the loan.

Other lenders participate in raw land acquisition with certain requirements in place. Typically, this includes cross-collateralization of other properties and evidence of feasibility work. Generally, a path to entitlement and the ability for the lender to finance future stages of development are crucial prerequisites for these types of loans from “non-land bank” lenders.

Horizontal Development Loans

Horizontal development refers to obtaining entitlements and adding infrastructure to prepare a piece of land for vertical construction. For example, this includes finalizing the permitting on the land, installing utilities, or laying a concrete pad. Generally speaking, a horizontal development loan will include a combination of these elements.

In many cases, borrowers may not have access to the capital that is required to move a project into its next phase (vertical construction). Horizontal development loans can help bridge this gap. At this stage, if you have an existing land loan that you’re looking to refinance, loans that are over-leveraged make it difficult to do so without an additional capital commitment. Seek a lender that underwrites for the vertical construction phase in tandem with the horizontal phase and does not rely too heavily on leverage. This ensures there is enough equity for vertical construction so there is no need to raise additional capital. Additionally, this will allow you to refinance with another lender if the original lender is not providing financing for the vertical construction phase.

Vertical Construction Loans

The vertical construction phase is what most people think of when they imagine a property being developed, and entails the actual construction of the structure. It can involve a variety of asset types, including developments of single-family homes, apartment buildings, townhomes, or condominium complexes.

Typically, most of a construction loan is held back in an escrow account that is released on a certain schedule after a pre-determined portion of the construction is complete and verified by an inspector. This minimizes risk for the lender while providing the borrower with the funds needed at each stage of the process.

vertical construction loan

Post-Construction Loans

Once a project is complete and before its full profitability has been realized, financing is often needed to stabilize it. For an investment property, this means generating income. Stabilization is typically required to qualify a property for permanent financing that will carry it throughout its lifecycle. If a borrower cannot lease a property, they will need to work with the lender to determine a path forward (i.e. negotiating modifications to the loan).

Conclusion

As we’ve demonstrated, obtaining financing at these various stages of your development is a critical component to ensuring its success. Be sure to work with a lender such as Broadmark Realty Capital that has the experience, strong balance sheet, and technical expertise to maximize the value of your real estate project, regardless of the stage at which you get involved.

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.