Is Real Estate Financing Possible with Alternative Funding?

Alternative Small Business Funding

Traditional loan systems have increasing lender guidelines that the average small or large business no longer meets the requirements. These traditional loans are not financially viable as most require large upfront payments. Traditional lender financing only works well for specific borrowers looking to acquire particular properties.

The discovery of alternative funding might be the key to successful creative real estate financing, giving your business more opportunities and opening doors that you might not have imagined. 

Alternative financing (private money) often does not have strict requirements for loan approval, and funds become available in as little as three days compared to 6 week or six-month holding period. Thus, alternative funding for real estate financing is not only possible but a more preferred method of financing.

Types of Alternative Loans Available for Financing

Real estate acquisition is vital for any business's growth and expansion. There are various alternative loan options for small and large businesses, covering the purchase of real estate to the renovation, development, and building on the estates.

We discuss below in detail the available alternative loan options that finance land development and construction, fix and flip properties, and multifamily residential, commercial, and residential investment properties.  

Construction Loans 

Construction loans are offered on a short-term basis to finance development projects. Funding secured by a mortgage is used to cover the cost of the development and building construction. Funding is released to the client as needed, during the construction process as parts are completed, or based on a prearranged schedule.  Before the construction loan is disbursed, permanent financing will normally be arranged between the client and financer. Construction loans are used to purchase fixed assets. 

Types Of Property Considered for Construction Loans

Construction loans can be used to build, purchase, renovate or modernize, and covert existing facilities, such as:

• Commercial real estate. Industrial offices, self-storage, student housing, mobile home parks, retail, and mixed-use. These properties typically have a loan term of 1-36 months. 
• Multifamily Residential. Multifamily apartments with a size of over five units. Multifamily residents have a loan term of 1-48 months. 
• Single Family Residential. New-owner-occupied SFR, sized between 1-4 units. These estates generally have a loan term of 1-36 months. 

Acquisition Financing  

You may need additional funds to purchase real estate for expansion, storage, or owner-occupation purposes as a small or large business. A real estate acquisition loan may be the best and first choice for you.

Most legitimate businesses in any sector like; wholesale, service, manufacturing, retail, or professional service are eligible for financing. When purchasing commercial real estate, funding partners offer long-term loans, ranging between 10 to 20 years.

Applicants for acquisitional loans are generally required to input around 10 percent of the total cost of the real estate. Acquisition financing normally has very low-interest rates, making this loan option very affordable, especially if you are a small business owner.

Permanent Real Estate Loans 

Permanent real estate loans are only available to be obtained after the completion of construction. Permanent real estate loans are generally acquired to repay a short-term construction loan. Depending on the alternative funding partner, permanent loans are long-term and usually 15-30 years for real estate (fixed assets).

Funds acquired from permanent loans may be used to refinance against any existing debt. The borrower can also utilize permanent loans to finance any property acquisition or repayment of construction loans.

Business owners will be approved for permanent real estate loans (permanent mortgage) if they have a Loan to Value ratio of up to 85% and a qualifying credit score (determined by funding partners). Those applying for permanent mortgages need to provide a clear title and DOT to qualify.

Development Loans 

Businesses utilize development loans for the development of land, such as: excavation work, construction of buildings, laying and running electrical lines, construction of roads, and storm sewers. Development loans are generally short-term financing, 1 to 3 years.

For development loans to be approved, the property in question is typically used as collateral for the loan. The estate is only used as collateral until it is sold or can be financially supported by permanent financing.  

Development loans are only available for use before any buildings are constructed on the land, unlike construction loans that are used for the construction or renovation of buildings on the land. For a development loan to be approved by the lender, the business or owner must provide proof of past projects and experience.

Development loans can feature up to 65% Loan to Value and typically have low APR, making this alternative real estate financing option very desirable for businesses requiring finances for development projects.

Asset-based Loans (Hard Money)

Hard money (Asset-based) loans present a suitable funding option for businesses that have been refused loans in the past or pose a less than desirable credit score. An asset (for example, a physical property) usually is used to secure repayment instead of using the business's credit history as collateral.

Hard money loans are not a common loan to acquire as it is not offered by traditional banks and only through alternative funding providers. Asset-based loan APR can vary from 9 to 18%, with applicants needing a 65% to 75% Loan to Value ratio to be considered for approval.

Businesses that do not meet traditional bank loan criteria (i.e., low credit score) find a hard money loan very desirable and attainable. Whilst the interest rate of a hard money loan is higher; it allows borrowers to build a real estate portfolio or have access to financing that they would not through a traditional bank. 

Fix and Flip Loans

A Fix and Flip line of credit permit investors to improve, acquire and resell a property (for profit) with little to no money being spent out of pocket. Fix and Flip lines of credit will typically provide funding for up to 100% of the repair and purchase price. However, to receive 100% funding or as close to 100% funding as possible, the loan amount asked for needs to equate to 70% or lower, the given ARV (appraised after repair value of the property). 

Fix and Flip funding are short-term loans (1-12 months in length) that are usually paid back with the proceeds received from the sale of the renovated real estate. Funding received from the loan is most frequently used for repairs, broker fees, contractor fees, other aspects of real estate investment, and property purchases.

Businesses are only suitable for fix and flip lines of credit if they have proven experience of two or longer more years in the industry.

Properties Considered for Fix and Flip Lines Of Credit:

• Single Family Residential- These residential properties are between 1-4 units in size, with the loan term usually 1 to 36 months (dependent on loan terms).

 

Bridge Lines/ Bridge Loans 

Bridge loans, commonly known as "caveat loans" or less typically swing loans, are short-term loans repaid over three years. Bridge loans are offered to provide funding while the business or borrower waits for their long-term financing (e.g., permanent real estate loans or development loans) to be funded.

These short-term loans allow the business or borrower to access available funds to meet their current financial obligations. This provision of immediate cash flow is mainly used to pay business utility bills, employee salaries, and other accounts payable.

To ensure no delay in business operations, bridge loan options are provided to businesses that have applied or are applying for long-term loans such as development or permanent real estate loans. 

With a low APR, seasoned businesses with a comprehensive industry portfolio and experience are approved for bridge loans.

Properties Considered For Bridge Loans:

• Commercial Real Estate. Industrial offices, self-storage, student housing, mobile home parks, retail, and mixed-use. The Loan Term is generally 1-36 months.
• Multifamily Residential. Multifamily apartments larger than five units with a bridge Loan term is 1-48 months. 
• Single Family Residential. New-owner occupied properties between 1 to 4 units in size, with a 1-36 months loan term. 
• Dirt Development. Vertical and horizontal development construction (plats of 1-300) with a generally 1-36 months loan term.

Final Thoughts

Alternative funding provides an excellent option for a business that do not have the extensive documentation (pay stubs, bank statements, etc.) required by traditional real estate financing. Alternative financing options such as Fix and Flip lines of credit and hard money loans are great alternative options for those businesses who do not have sizable down payments (required for traditional loans).

Traditional real estate financing is losing out to private money as sellers are no longer happy with waiting months for a lender-financed deal that may not be approved. Alternative funding approves finances for businesses as long as they meet basic requirements. Approval of the chosen loan only takes a few days. 

You or your business now have the opportunity to turn over more real estate deals as money is not tied up for months, or you do not need to pay large amounts of money up front to secure a loan. Thus, alternative loans are primarily short-term funding that, despite their increased fees and interest rates, are the preferred method of financing real estate.