Real estate has long been viewed as a sound long-term investment with relatively low risk. Even in the most challenging times, people will always need housing and businesses will always need space to operate. For new investors, commercial real estate can seem like a riskier investment, but seasoned investors will tell you that the returns are worth the risk.
Types of Commercial Real Estate
Commercial real estate encompasses a wide range of property types, but the common thread is an intent to use the property to make money. Some examples of commercial real estate include:
- Industrial buildings and warehouses
- Retail stores
- Hotels and restaurants
- Storage facilities
- Healthcare facilities
Four Benefits of Investing in Commercial Real Estate
Investors choose this path for a variety of reasons, including:
Like all types of investing, commercial real estate comes with some risk, but the advantages can make this kind of investing more attractive than operating residential rentals or flipping for certain investors.
1. High Income Potential
Depending on the location and industry, commercial real estate offers the opportunity to generate a significant amount of income. When occupants pay rent, you get to keep everything after loan payments and expenses. This income can be significantly higher than the monthly returns for residential properties and comes with greater variability depending on the tenant and terms of the lease.
After the property is paid off, your profit increases and you have more funds available for improvements, other investments, or your own pocket.
2. Ample Opportunities
You can choose the type and scale of real estate that feels right for you:
- Start small with an office building or retail space that holds just a few tenants
- Grow your existing portfolio with additional properties in the same industry
- Diversify your existing portfolio by expanding into new types of commercial spaces
Commercial real estate also typically has less competition than residential real estate, especially when the housing market is tight. Whether you want to start small or go big, you can probably find a deal that matches your preferences.
3. Long-Term Tenants
Although there are no guarantees, commercial tenants often lease spaces for longer. This is because businesses spend a lot of money to make renovations to the building. The lease terms are also longer than residential leases, so there is less turnover, which means more months of consistent rent. This allows you to keep more profits and have more consistent revenue than with many other types of investments.
Of course, not every business succeeds, so you have to have some tolerance for risk if you choose to invest in commercial real estate.
4. Limited Maintenance
Depending on the arrangement, commercial tenants are often responsible for upkeep of the building. In addition to the labor, this could also include property-related expenses such as utilities, property taxes, landscaping, maintenance, and insurance.
Аlthough these types of arrangements are possible with residential properties, owners typically have to be more engaged as landlords than with commercial tenants.
What Are Commercial Real Estate Loans?
Most people don’t have enough cash on hand to fully finance the purchase of a commercial property. This is where commercial real estate loans come in. This type of loan is used to purchase a property for business purposes, whether you intend to use the space yourself or rent it to others.
When you get a commercial real estate loan from a traditional lender—such as a bank or the Small Business Administration (SBA)—you are required to use a minimum portion of the property for your own business. This requirement makes it more challenging to get loans for investment properties that you don’t intend to occupy yourself.
Is It Difficult to Get Commercial Real Estate Loans?
The ability to secure a commercial real estate loan depends on a number of factors, including:
- The type of loan you intend to pursue
- The type of property
- Your financial history
- The size of your down payment
- The details of the deal
If you intend to pursue a traditional loan, you must meet certain criteria that may include:
- An intent to use a majority of the property for your own business
- A minimum credit score of 660
- A minimum debt-to-income ratio of 1.25
- A minimum down payment of 25 percent
- A high occupancy ratio
If you meet these criteria, be prepared to open your books and provide your tax returns to demonstrate that your business can generate enough income to cover expenses. Most lenders want to see some income history, which means that getting a commercial real estate loan for a new business is more challenging.
It’s not impossible, but a new business will have to jump through even more hoops to get a loan. You also have to sign a personal guarantee for a conventional commercial real estate loan, which is one reason your individual credit score matters.
Hard Money Loans for Commercial Real Estate Investors
If you plan to purchase commercial property for your own use, a conventional loan could be a good path if you meet all of the requirements. If you don’t meet the requirements, or if you want to close faster than a traditional bank allows, a hard money lender may be able to quickly provide the cash you need. Hard money loans are also a good alternative for certain types of businesses that traditional banks typically won’t finance, including cannabis growers, gentlemen’s clubs, and religious facilities.
If you intend to purchase commercial real estate for investment purposes, a hard money lender can offer flexible financing options that traditional lenders cannot. Hard money lenders also don’t have the same occupancy requirements as traditional banks. You don’t have to use a portion of the space for your own business, existing tenants are not required, and you can get loans for multiple investment properties.
Hard money loans are based on your equity, not on your creditworthiness or financial history. With a hard money loan, you get faster approval, less scrutiny of your personal finances, and an easier qualification process.
Commercial Real Estate Loans with Socotra Capital
Socotra Capital offers hard money commercial real estate loans for both business owners and investors. If you’re a business owner with a solid plan, we provide funds to purchase a commercially zoned property, no matter how much of the space you intend to use. Because we are not limited to the same regulations as traditional banks, we’re also able to offer loans for less conventional business types.
If you’re an investor, Socotra Capital can provide a commercial real estate loan to help you build your portfolio. Unlike traditional banks, we don’t have minimum occupancy requirements, so if you see a vacant property with potential, you can secure a hard money loan to purchase and improve it.
Because our loans are backed by equity, we’re able to offer more flexible terms than conventional banks, and approvals are not based on credit or income history. We’re also able to move much more quickly with close times as short as five days, sometimes even less.
To learn more about how to generate personal revenue through investment properties, check out our free guide How to Grow a Passive Income Portfolio in Today's Market.