“Private Commercial Mortgages Can Be Used As Primary Or Secondary Financing Solutions”
One of the great things about private lending is that supply is growing, providing a wider range of interest rate options and property financing applications. More and more investors are diversifying into private mortgages due to the solid rate of return and the fact that their investment is secured by real estate.
For instance, there are private lenders that are looking to secure better than bank interest rates, bond rates, GIC’s, Tbills, and so on, but do not want to take high risk.
At the lower end of the rate spectrum, its possible to secure private commercial mortgages in the 6% to 8% range when that was mostly unheard of not all that long ago.
As risk goes up, so does interest rates as it does with any form of financing, so there is virtually no upper limit for private money as higher risk deals can come with significant rates and financing fees.
Key Benefits Of A Private Commercial Mortgage
The other main benefits of private lending for commercial properties are 1) a more straight forward, less complex application, and more predictable funding process compared to a bank; and 2) the speed with which a deal can be completed.
Let’s look at these benefits more closely by citing a few examples to bring the points home.
Reason #1 – Predictability
In the construction industry, many builders and developers will only use private money due to the more predictable manner in which draws are advanced. Private lenders will still have a work confirmation process that may even involve third parties, but for the most part, the amount and timing of draws is fairly predictable allowing the overall project cash flow to be well managed and the project itself kept on track.
Reason #2 – Speed
Regardless of what you require commercial property financing for, be it purchase, refinance, debt consolidation, bridge funding, etc., there is most likely going to be a period of time you have to work with to get things into place. Most business financing requests require funds to be made available by a certain date so that a transaction can close or complete. Failure to do so can result in a deal being lost, additional costs being incurred, profits foregone, and so on.
So getting the deal completed in the time you have to work with can be critical for a whole number of reasons. If bank or institutional financing cannot be safely and predictably secured in the time you have, then it can make a great deal of sense to first arrange short term financing through a private lender which will get the transaction completed and provide time to get lower priced long term financing in place if that is required.
One could argue that the cost of financing will be higher with private funding so its should be avoided if you can qualify for lower cost debt. But the counter argument is that if you don’t close on time or provide capital when it is required, how many more times over will the cost for being late add up to as compared to the incremental cost of a short term private commercial mortgage.
Reason #3 – Flexibility
As long as you have equity to leverage in commercial real estate, private mortgages can be used for a broad number of purposes that may or may not have anything to do with the improvement of the property being mortgaged, or the business that is occupying it. Compare this to conventional mortgage financing where the use of funds can be considerably restrictive, private lending can provide a source of capital that may not otherwise be made available for a given application.
Reason #4 – Alternative Capital Source
There are times when a borrower cannot qualify for bank financing but still has equity in a commercial property that can be leveraged.
While this is certainly a secondary source of financing its also an important one in that a lack of timely capital can cause business failure and loss of property.
Getting a private loan in place can provide time to either get things back on track so that you can qualify for bank financing, or wind down the business or sell the property in an orderly fashion so no value is lost through some form of forced liquidation.
Sources of Private Commercial Mortgages
Like any type of private mortgage financing, most commercial mortgages funded from private sources will come from individual lenders or investors.
As the amount of financing increases, the private money supply will come from two or more lenders working together, formalized consortiums and joint ventures, and mortgage investment corporations or MIC’s.
Once the deal size exceeds $2,000,000, the supply for private commercial mortgages is limited to investor groups of some form due to the larger portfolios they have to work with.
Private lenders, regardless of their structure, will all have their own lending and funding requirements and targets of interest which can related to geography, property type, and usage.
The key to locating and securing a private mortgage for a real estate property is to work with an experienced mortgage specialist that can not only accurately assess your needs and direct you to highly relevant lender, but work with you to properly apply for the financing and get the deal funded.
If you’re looking for a private commercial mortgage for purchase, refinance, construction, debt consolidation, or some bridge financing requirement, I suggest that you give me a call so we can quickly go over your requirements together and discuss different funding options that maybe available to you.