When looking for financing solutions to purchase a property, many options are available. One that’s sometimes overlooked is mezzanine financing. Mezzanine financing can be an excellent opportunity for people who want to increase the return on equity of their property investments without having to pay out of pocket or take all-cash loans.
This article will explain mezzanine financing in general and how it works in real estate specifically.
Mezzanine financing falls somewhere between junior debt and equity. It can be used to take out a loan to purchase real estate, or it can also provide you with additional capital at any point. This financing option usually extends for a period between five years and more.
Mezzanine lenders are typically big institutions that lend money to high-value properties like shopping malls, warehouses, hotels, and office buildings.
For you to benefit from mezzanine financing in your business transactions, there are a few things that you need to keep in mind:
Most mezzanine lenders require that the owner have at least 20% equity in their property before applying for a loan. Their interest rates are also typically much higher than those of junior loans or senior debt. Hence, it’s important to use them only when you truly need the money and can pay off these extra costs with your profits by renting out your building space.
Mezzanine Financing in Real Estate:
In real estate, mezzanine financing works similarly as it does in other industries where this type of lending is used. The interest rates are usually fixed, so they won’t change over time unless changes occur in other conditions in the market or economy. These loans are meant only for short-term use since their repayment term is relatively short compared to other types of mortgages and business lending options.
Mezzanine financing can be a great solution for real estate investors who want additional capital without having to sell off some equity in their property.
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