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The Pros and Cons of Using Commercial Residential Real Estate Loans

[Updated: Mar 04, 2021 ] Oct 08, 2019 by Aly J. Yale
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Real estate investors can finance their projects in dozens of ways. For beginners, FHA loans, home equity loans, and P2P lending platforms can be good options.

f you have more experience, though, a commercial residential real estate mortgage might be a better option.

This is a broader bucket of loans that contains things designed specifically for seasoned investors, like:

These loans offer lightning-fast closings, let you qualify based on investment history or proven rental income, and come with short terms -- a big perk if you’re looking to fix and flip quickly.

But, of course, there are some downsides. Let’s look at this financing option from both angles.

Which types of commercial residential real estate loans are available?

There are several types of loans that fall into this category.

Hard money loans are issued by private investors or investment companies and are asset-backed. So your ability to qualify depends on the property you’re buying -- its after-repair value, cap rate, and so on.

Medium-term and bridge loans are also in this category. These have very short repayment periods (a few months to a few years) and they’re designed to finance investments you don’t plan to hold for the long haul.

Advantages of commercial residential real estate loans

One of the biggest upsides of these loans is that they don’t come from banks or traditional financial institutions. That means you get to skip the long, laborious application process and your financing isn’t based on creditworthiness alone.

Instead, your loan options depend on your experience as an investor (years in the business, past rental income, etc.) and the property you’re choosing (after-repair value, cap rate, and so on). This makes the approval process easier and faster. Many lenders who offer these loans can fund a deal in a few days.

Another big perk is that they come with shorter terms. For the most part, these loans last between a few months and a few years. If you’re looking to finance a fix-and-flip without a lengthy mortgage note, this can be tempting.

Finally, since you’re dealing with private parties on these loans, you might have more room for negotiation. Big banks and financial institutions are less likely to allow this.

The short version: pros

  • Rental income and investment history can qualify you
  • Shorter terms
  • Fast closings and simpler application processes
  • More room for negotiation

Disadvantages of commercial residential real estate loans

On the downside, hard money and other loans in this category tend to come with higher interest rates -- sometimes as much as 10 points higher than traditional loans.

Keep in mind that traditional loans collect interest for 15–30 years. Compare the total interest costs you’ll pay on all your options, not just the interest rate you’re quoted.

On top of this, origination fees and closing costs are also usually higher -- and there’s often a larger down payment requirement. You can expect to put at least 20% down on these loans. Sometimes it can be 30% or more.

Another disadvantage is that hard money, bridge, and commercial residential real estate loans are generally only available to seasoned investors -- borrowers who can prove their experience and know-how in the industry. They’re not typically an option for beginning investors.

The short version: cons

  • Higher interest rates
  • Higher down payments and closing costs
  • Not available to new investors

The bottom line

If you’ve been around the real estate investing block a few times, a commercial residential real estate loan, bridge loan, or hard money loan could be a good way to finance your project.

Don't have the experience needed for one of these loans? You have options, too. Consider an investment property loan or a government-backed mortgage to get your first investment off the ground.

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