When you have capital to invest, you want to make sure you’re making smart decisions. Although no investment can guarantee returns, some are more proven and reliable than others. The cryptocurrency trend is hard to avoid, but if it feels too risky for you or if you want to diversify your portfolio, investing in commercial real estate is another approach that is worth considering.
Real estate investors have been investing in commercial real estate since time immemorial. It takes discipline to control costs, find good tenants, and ultimately take care of your property so that it takes care of you. All of this comes with a significant amount of time to invest, but there are other ways to invest in commercial real estate than buying yourself. By investing in real estate debt rather than equity, the returns might be less, but less work is required, and the investment is more secure. Investing in hard money loans gives you regular monthly income, and when you choose your partner wisely, you get the benefit of earning money from interest payments without having to do all the legwork.
Investing in Hard Money
Hard money lenders use funds from private investors to fund real estate transactions. Typically, borrowers will use private lenders only when they can’t get a conventional loan because of their credit rating, financial history, the condition of the property they want to purchase, or a need to act fast. Private lenders are not subject to the same restrictions as conventional lenders and can offer more creative financing options to help investors close profitable commercial real estate deals.
When you participate as an investor, your money is secured by the real estate and a deed of trust, which is similar to a mortgage. Borrowers use their equity as collateral, so if they default on the loan, the lender can foreclose on the loan, taking possession of the property, thereby protecting your investment. As a hard money investor, you get the benefit of being in the best position in the capital stack, so you get paid back first in the event of a default. Although investing in commercial real estate is not completely risk-free, the built-in protections and regular income make it appealing to many investors.
Types of Commercial Real Estate Loans
A private lender might offer a broad range of loan types for real estate investment:
- Bridge loans help borrowers cover a gap until they can secure traditional funding, typically when a property is transitioning or has newer tenants.
- Fix and flip loans allow flippers to do all the work while investors make money on their loan payments.
- Purchase money loans can be used when needing to close quickly. This is common in some real estate circles as contracts can start with a handshake and off-market pricing.
- Cash-out refinance loans allow borrowers to use the equity in their properties to get cash to cover short-term expenses.
- Buy and hold loans allow borrowers to close quickly on rental opportunities.
- Short-term rental loans can be used for a hot market that has a lot of real estate investors jumping at the opportunity to purchase property and generate higher incomes than longer-term rentals.
As an investor, look for a private lender that has experience across loan types, project types, and geography to mitigate risk. Ask about their track record for loan repayments and the criteria they use to make decisions about borrowers. Other questions to ask a hard money lender include:
- What are the typical returns?
- What type of volatility can I expect?
- What is your average loan-to-value ratio?
- What market trends are you currently seeing?
- What are your requirements for lending?
- What are your fees?
- What is the typical term for your loans?
The more you know before making an investment decision, the more comfortable you will feel.
How Socotra Capital Benefits You
When you invest with Socotra Capital, you can be confident that an experienced team is administering private loans with the intent of generating returns for you. This means that we closely evaluate every deal to make sure that both the borrower and the property are qualified. We also ensure the terms of the loan are set up for success for both the borrower and the investor. This close scrutiny helps reduce risk to both the lender and the investors who provide funding. The result is regular returns that add to your monthly income with no time investment from you.
If you would like to learn more about investing with Socotra Capital, access our Investor Portal to take the next step.