Real Estate Investment Loans

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So you like the idea of investing in real estate, but you're not sure of your options when it comes to financing your real estate purchases. Here we're going to talk about commercial real estate investment loans so you have a better idea of the choices available to you.

Real Estate Investment Options

Although the focus of this article will be on your options when it comes to loans dedicated to real estate investing, we want to remind you that you can participate in the real estate market without purchasing property directly. We'd like to mention some of those alternatives so you can make a more informed investment decision.

Real Estate Mutual Funds

Additional Resources

Real estate mutual funds are an easy way to get started investing in real estate. These types of mutual funds either invest in real estate investment trusts (discussed later) or buy shares of stock in real estate management companies and / or property builders.

Real Estate Investment Trusts

Real estate investment trusts, or REITs, are similar to real estate mutual funds in that you are buying a share of a trust that focuses on the real estate industry. With a real estate trust, you get the benefit of a board of directors that provide professional advice on the types of properties in which to invest.

By investing in a trust, you also benefit from the pooling of money within the trust to purchase a diverse portfolio of real estate holdings. Finally, the trust provides you with professional management of the properties owned.

Tax Lien Certificates

The last real estate investment option we're going to mention has to do with tax lien certificates. A tax lien basically gives you the right to take possession of a property if the property owner does not pay the outstanding taxes and interest payments due on their property. In many situations, this is a win-win investment strategy.

For example, if the property owner pays you the money owed, you are usually entitled to a generous interest rate on the outstanding amount. If the owner does not pay all the money owed, you can take possession of the property.

Investment Property Loans

If you're still interested in getting into the real estate market directly, then you've got a couple more options when it comes to investment property loans. Bear in mind that if a property is distressed or the original owner cannot make enough rental income with the property to cover expenses, there may be a very good reason the property appears to be a bargain.

Assuming a Loan

Sometimes properties are just not making enough money for the original owner to cover their expenses. These owners then find themselves in a negative cash flow situation and may be willing to let you assume their loan.

The bank will likely charge a fee to process the transaction - one percentage point on the outstanding balance is typical. Assuming a loan also allows you to keep your available cash and funnel it into maintenance or upkeep on the property. Finally, by assuming a loan you may be well into the amortization process and more of your monthly payments are likely going to paying off principal and not interest charges.

Wrap Financing

Another way to finance a real estate investment is with wrap or contract financing. With this type of arrangement, the original loan or mortgage stays in place and new loan from a financial institution or the seller is added. In some situations, you may have to get permission from the existing lending institution - this is usually indicated within the terms and conditions of the loan.

Wrap loans can be a winning proposition for the seller and buyer of a property. If the going interest rate is higher than that on the original loan or mortgage, a half-way agreement is often reached. For example, if the existing loan is at 6% and the going rate is 8%, then the wrap loan might very well wind up at 7%.

Trust Loans

If the seller owns the property free and clear of loans and the property has a lot of deferred maintenance or a high vacancy rate, then you may not be able to get financing through a bank for certain commercial properties. In that situation, the seller can act like a bank through the creation of a trust loan.

With a trust loan, the seller can work with the buyer to create flexible payment arrangements, allowing the buyer to devote more up-front cash to address the deferred maintenance.

Whenever you encounter a situation where the seller also plays the role of the banker, you need to make sure you've engaged the services of an attorney familiar with these types of arrangements to help draft the contracts and protect everyone's best interests.