What Commercial Real Estate Borrowers Should Know About Debt Funds

It is not unusual for commercial real estate borrowers to work with debt funds. In real estate, they are beneficial to both the lender and the borrower. This article is for you if you’re a commercial real estate developer considering working with a debt fund.

In this article, you will learn what a debt fund is, what it means in real estate, and how they are beneficial to commercial real estate borrowers and lenders. If you are a CRE borrower and have decided to work with debt funds, this article will help you learn how to get started with that and what you should watch out for as a borrower looking to access debt funds to handle real estate projects.

What are Debt Funds?

Generally, a debt fund can be a mutual funds scheme or exchange-traded fund. It is an investment market like every other market; the difference, however, is that the debt fund holds debt securities. Also known as a bond or fixed-income fund, a debt fund is a relatively low-risk market where investors who would instead make low-risk investments can invest their money.   

While they are often mistaken for equity investments, the two terms and modes of operation are quite different from each other and almost opposite, in fact. Many might find that they would rather invest in debt funds than in equity funding.  

In commercial real estate, a debt fund is a way by which investors invest their money in commercial real estate loans for commercial real estate developers, private individuals looking to finance their building projects or landlords looking to improve their rental portfolios.  

Benefits of Debt Funds for Commercial Real Estate Borrowers

Debt funding is beneficial for both the lender and the borrower. For the lender, the first benefit is, of course, capital appreciation. Investors get a better increase in their capital than they would have gotten if the money was kept in bank savings. 

Investing in debt funds is a safe way to grow your money. Compared to investing in equity stocks, the risks associated with them are low, and the profit is guaranteed since the returns are foreseeable. A debt fund is a great investment choice for an investor who would rather not take high risks; it helps them avoid the market instability that comes with equity stocks. 

Having stated the benefits of investing in debt funding for the lender, what are the benefits of debt funding for a borrower and, more specifically, a commercial real estate borrower?  

Provision of Capital/Funds

The first obvious advantage is that the borrower gets the needed funds to finance their real estate projects. Getting started in commercial real estate requires a lot of money. With debt funding, it is a lot easier to get that hassle out of the way.

Whether you’re a private individual looking to build your own home or a developer in commercial real estate looking for funding to complete or start your projects, working with a debt fund will help you get the needed financing for your project. It is important to note that the common loan types that are available include: bridge loans, construction loans and rehab loans.

With debt funding, you can easily access loans to build your portfolio as a landlord and developer. It also makes it much easier if you are just starting up your career in commercial real estate.

Flexible Repayment Structure

Another benefit for commercial real estate borrowers is repayment flexibility. With debt funding, commercial real estate borrowers can obtain loans and pay in a manner that makes it more convenient and easy on their finances. It also helps build wealth as money can be used to reinvest and can triple before they pay it back to the lenders. At the end of the day, the borrower secures funds to carry out their project while also getting the chance to pay in such a way that, in the long run, it mutually benefits them and the lender.

The Borrower Stays in Control of their Business

An advantage of debt funds over equity financing is that the borrower gets to keep a hundred per cent control over their company and business. This is very much unlike equity funding, where capital is traded for company shares, and the funding parties each get a say in vital company decisions. With debt funding, repayment is made with money, and you, as the borrower, retain complete control over your company.

Quicker and Less Excruciating Procedures

Working with debt funding is a relatively quicker and less bureaucratic process of securing funds for your real estate projects.  The process is significantly less strenuous if you work with a private money lending company as a borrower. Getting funds when working with a private lender is easier, more personalized, and you have a high chance of securing a loan with a less-than-perfect credit history and portfolio.  

How Can Commercial Real Estate Borrowers Get Started with Debt Funds?

Find a Company that Suits Your Needs

Find a suitable company that is invested in debt funding. There are different options available to you as a borrower. Banks and credit companies are great options to approach for funding. There are also private individuals and private companies who are invested in debt funding and can be of great help to your business too. Weigh your options, read and research the benefits of obtaining credit from banks and private lending companies and decide which would be a good fit for you.

Use a CRE Financing Marketplace 

To find a lender that would meet your requirements, consider using an online marketplace that connects lenders to borrowers. An example of such companies is Finance Lobby 

What Should Borrowers Watch out for when Working with Debt Funds?

There are essential factors to consider by both the borrower and the lender when it comes to debt funding. As a lender, you want to take into consideration the risks associated with investing in them. You also want to consider the cost and, of course, the Return on Investments. A borrower should watch out for the following factor before working with debt funding. 

Consider Terms of Funding

Consider the terms of lenders and the repayment scheme and whether or not it is a good fit for you. You want to ensure that the loan terms are in your interest and that the repayment plan is flexible and patient enough. Some repayment schemes involve paying a particular amount monthly; some others require bulk payments made at once. Decide which of these options is favorable and go for it.   

As a borrower it is important to know that the property funded will act as collateral in case of default. Also, these loans normally have higher interest rates and lower loan-to-cost ratios. More often than not, there are additional fees like exit fees, servicing fees, origination fees, etc. 

Conclusion

Conclusively, debt funding is, without a doubt, a very effective way commercial real estate borrowers can start and complete projects and make a decent profit. It is a lot safer and more beneficial to the borrower than equity funding. 

The best way to find the best lenders for your commercial real estate projects or to find borrowers if you are an investor who has invested in debt funds is to engage the services of a commercial real estate financing marketplace. This is what we do at Finance Lobby; we connect you to your choice borrower or lender. Finance Lobby is the Commercial Real Estate Financing Marketplace that connects brokers to lenders to make the perfect-fit deals.   

November 2, 2022

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