For many first-time/new investors, the biggest roadblock faced is the funding of the deal. Most new investors don’t have the cash needed to tackle a deal, but this shouldn’t be an obstacle. There are many ways to get the funding needed to take advantage of opportunities that come your way. It is important, though, to do your due diligence when looking at these options; you don’t just want the funding with the lowest rate. Loan to value, term structure, and the amortization schedule should all be taken into account and analyzed. Though there are many, many creative ways to get funding for a deal, there are four that are the most common.
This is the most common way for someone to get funding for a deal. Banks will loan money for any kind of commercial property, so long as it fits their requirements. With that said, when it comes to a commercial deal, banks will look at your personal credit and investment history to an extent, but, for the most part, they are looking into the deal themselves. They also want to verify that it is a good deal so that they feel more comfortable and confident loaning you money. Generally, banks will loan out about 80% of the price of the deal (on the high end), leaving you with a down payment of about 20%. There are certain instances where you can get more LTV than normal, but this rarely happens and will only take place if either the deal is amazing or your working relationship with the lender is very, very strong.
Another way to get funding for a property is through private funding. This is where you bypass the banks, and go right to investors with liquid capital. There are many investors that have the funds but don’t want to deal with putting together a deal. Those are the investors you want. One thing that is important to keep in mind is that with private funding, profitable cash flow must be split amongst the investors (however it’s laid out) until the property is either sold or the investor shares are bought out.
There is a whole blog post on our site about syndication, so I’ll be brief here. Syndication looks very similar to private funding, in that you would be pooling investors’ money together for a deal. However, in this case, the order is reversed, and on top of that, a syndicated deal is much more structured and scrutinized. With private funding, you would already have a deal and you’re in need of financing. With Syndication, investors pool their money first with the intention of the deal sponsor (you) going out to find a deal for the group.
A seller-financed deal is exactly what it sounds like; the seller of the property finances the property for the buyer and keeps the note on it if it still has one. Typically, this way of financing looks very similar to getting a bank loan in the sense that you’re still going to pay a downpayment, have some kind of interest rate (usually lower than what the bank will offer), and a term on the loan. Overall, getting funding this way makes the process much quicker due to having less hoops to go through to close the deal. However, it’s always a good idea to hire a contract professional to draft and review the loan contract.