Financing Undeveloped Property For Commercial Real Estate Investments
The first time you decide to buy undeveloped property because it will be a good commercial real estate investment, you typically don’t expect to encounter many difficulties getting a loan. Your financing options are different, though, when you are working with land loans, and the loan terms can be different from what you are accustomed to dealing with. Here are few things to expect when you secure financing for your new investment.
It can be harder to find a lender for land loans because the value of the land itself is serving as collateral. Because of this, many banks and mortgage institutions do not offer land loans. When they do, the terms are generally more fixed than you might like. Some lending institutions offer subprime loans, which have a higher financing cost but come through quickly. In some cases, lenders may ask to see additional collateral, such as other real estate you own, to ensure that you don’t back out on your investment. If you are able to find a loan through a bank you regularly deal with, they may request that some of your financial assets at their institution become collateral.
Another way that you can finance undeveloped property is through the Small Business Administration. Its 504 loan program allows for the purchase of land and has one of the lowest down payments that you usually find for property. This kind of loan is usually low interest and long term, with up to 20 years allowed to pay the loan back. This option may be especially ideal if you are a small business looking ahead to buying and building.
As you find ways to finance your land, it is important to remember that the terms of any loan you receive will usually be different from what you might be expecting. Noticeable differences are in the down payment, interest rate and the length of the loan. Land loans typically have higher down payments. An average down payment is about 30 percent. Interest rates also tend to range higher; because of this, some lenders allow interest-only payments. Conversely, land loans tend to be short-term loans. You may have anywhere between a few months and a few years to repay your loan, with the understanding that you will begin building on the site within that time.
Be informed about the different ways you can finance undeveloped property for commercial real estate. Because the terms of land loans usually differ from what you typically work with, take the time to understand your investment so that it can indeed be a good use of your money.