HOW DOES REAL ESTATE FINANCING WORK?

Real Estate Financing is a method in which borrowers are able to add their equity in real estate to their collateral borrowing pool and borrow at bank rates. Commercial Real Estate mortgages are typically stand-alone financing products, however, they can also be added to an asset-based borrowing certificate as a part of a larger loan.

Advance rates for real estate finance tend to be in 70% to 80% range of orderly liquidation value. Lenders require a recent appraisal for any property that they are providing funding against. Some lenders will require an additional piece of real estate called Boot Collateral to serve as additional security for the same deal. The borrower will not be able to take any money out against the value of this piece of real estate because it is already pledged as collateral to the lender.

In the cases that a property is not owner occupied, the borrower will have to show the lender that the property generates enough cash flow to cover their debt, whether this be via rental occupancy levels or other revenue-generating purposes. All Borrowers will need to show that they generate sufficient operating income to pay off their debts. For the borrowers that prefer to invest in short-term real estate transactions, hard money loans are best. These have higher interest rates and point against the loan balance at closing, but they are the most efficient for short-term.

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