When investors start looking for their next acquisition, one of the most important questions they ask is what kind of loan options exist. There are many types of commercial real estate financing, and understanding the differences between them can help you choose the right structure for your investment strategy.
Here are eight of the main financing options that investors rely on today.
1. DSCR Loans
The first option many investors explore is a DSCR loan, which stands for debt service coverage ratio.This loan is based almost entirely on the performance of the property.
You tell the lender what the property is, what the rent is, and what the expenses are. If the numbers make sense, the lender issues the loan. There is no need to document extra personal income or meet the strict qualification requirements traditional banks often demand.
These loans come with higher interest rates, but they are flexible and far easier to obtain. For many investors, DSCR loans are one of the most accessible types of commercial real estate financing when they want to move quickly.
2. Commercial Bank Loans
Commercial bank loans are a more traditional option. Many local banks enjoy working with local investors, which makes this a reliable financing route for deals of varying sizes.
These loans typically offer competitive interest rates. The main downside is that amortization periods are shorter, and banks often want the loan repaid or refinanced within about five years.
3. Portfolio Loans
If you own multiple properties, a portfolio loan can serve as a flexible tool for growth. In this structure, the bank sets up a line of credit secured by your entire portfolio rather than a single asset.
A portfolio loan takes some work to establish, but once it is in place, it can be very helpful for acquisitions and improvements. Many experienced investors consider this one of the most useful types of commercial real estate financing as they scale.
4. Agency Loans
Agency loans include financing backed by Fannie Mae or Freddie Mac. These loans operate similarly to residential products backed by the same agencies.
They usually offer thirty-year amortization, long-term fixed rates, and strong interest terms. The tradeoff is that agency loans require more documentation and have more qualification hurdles. Most investors begin exploring agency financing when deals reach the four-million-dollar price range or higher.
5. Private Money Loans
Private money loans come from individual investors rather than institutions. They are flexible and often tailored to the specific needs of the borrower and lender.
However, private lenders cannot extend these loans to owner-occupants because of Dodd-Frank regulations. Those restrictions do not apply to investor transactions, which makes private money a workable option for commercial deals.
6. Hard Money Loans
Hard money loans are similar to private money loans, but they come from institutions instead of individuals.
These loans are usually easy to obtain and very flexible, but they almost always come with higher interest rates. For investors who need immediate financing or support during a turnaround project, this can still be a useful option.
7. Bridge Loans
Bridge loans are institutional loans designed for temporary or transitional financing. They resemble hard money loans but are often more sophisticated.
Bridge lenders require more underwriting and analysis of the property, but in return, they offer better interest rates and more structured terms. Many investors use bridge loans when they plan to stabilize a property and refinance into long-term debt later.
8. Seller Financing
Seller financing is a personal favorite for many investors because it is highly customizable. In this arrangement, the seller acts as the lender.
The buyer and seller negotiate the terms directly, which means you can structure the deal in whatever way benefits both parties. When available, seller financing is often one of the most advantageous types of commercial real estate financing because of its flexibility.
Final Thoughts
There are many types of commercial real estate financing, and the right option depends on your goals, your experience level, and the specifics of the property you want to acquire. DSCR loans, bank loans, agency loans, private money, bridge loans, and seller financing all offer different benefits and requirements.
Many investors we work with appreciate having clarity about their financing options and understanding which structures best support their long-term plans. If you are looking for investment opportunities in Pennsylvania or Maryland, reach out to us. We are always happy to help you analyze your financing choices and move confidently into your next acquisition.
