Is government financing on commercial real estate properties worth while?
The answer is not always.
SBA Loan - If you get an SBA loan on a property, generally speaking, you will usually do okay on the rate and on how long they'll let you amortize the payments. You will have to pay a fee for a packager (usually an authorized bank) to submit the loan request package on your behalf. The good news on this, is that the fee is nominal to the entire loan as a whole and the guarantee from the government may allow you to be approved when otherwise you would not have been. Choosing a loan through the SBA has its additional hoops and hurdles more so than getting a regular loan from the bank. However, if this is your best shot of getting approved, then choosing an SBA loan may be a good option for you. It is particularly a good option for owner occupied properties who don't want to tie up all their working capital in the property. In our thirty years, we have had generally good experiences when going the SBA route.
HUD backed loans - HUD backed loans for commercial real estate are much more complex and tricky in general. It is possible to receive some too good to be true loan rates and that are amortized for up to 40 years. However, unlike SBA loans, the HUD backed loans are more like a collaboration and marriage. With a HUD loan, you are required a have annual audits and also other operating costs that ware much higher than would normally be. With these additional annual costs, you can anticipate adding 2-4 additional percentage points more on top of your original loan as an added cost. There will also be a lot more building requirements and red tape inclusive of paying subcontractors higher than normal wages. You will also need a government approved loan funding agency to help you with this kind of loan, which is yet another additional cost. Further, getting approved is very difficult and the government tends to favor very large corporations who do deals with them regularly. We recommend that you only get a HUD loan if that is the only way you can finance your property. We had a lot of tough times dealing with HUD in our experiences with them and it was not an easy ride. Make sure you factor in all the "hidden costs" that you will have if going this route.
Conclusion - Pay cash or use conventional banks or investor financing when funding your commercial development properties. Only use a government guaranteed loan vehicle as a last resort when there is no other way to get the deal done. Factor in all the additional costs of using a government loan to the face value of your loan rate, so that you are not surprised later on when cash flow it not what you expected it to be.
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Greg Arbutine
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Very interesting and informative article!