If you’re a real estate investor, you’re probably interested in learning more about the other types of loans available on the market. Conduit loans were created around the end of the twentieth century. They are mostly unknown to the majority of investors in commercial real estate. If you’re wanting to learn more about this type of loan, it’s a good idea to start doing a little bit of research.

How it Works

As a commercial investor, it’s a wise idea to be familiar with all the loan types out there. CMBS conduit loans are commercial mortgage-backed securities. These commercial mortgages are bundled with other loans and made into securities. Once they’re securitized, they are then put on the market for sale to investors. These packaged loans act as a form of collateral to back the security.

What it Does

When investors choose CMBS conduit loans, they mostly do so because of the beneficial fixed interest rates. These rates tend to be much lower than traditional mortgage loan rates. However, the rates can change based on a few different stipulations. Factors like the property’s location, the quality of the property management, the quality of the property itself, and the quality of the tenants can either raise or lower the interest rate. If your property has all these items in your favor, then you’ll expect lower rates than a high-risk property would entail.

Why it Works

CMBS conduit loans are usually favorable investments to make. There are many institutional investors out there in the secondary market. When the security reaches the market, it is then broken up into different pieces called tranches. Each of these tranches will be different based on the interest rate, maturity date, and how much return can be expected. Investors have differently related tranches based on the risk amount of their businesses. For example, a hedge fund would be considered a high-risk buyer, and would probably have stricter terms. A pension fund would be much lower risk and this tranch would have more lenient terms. Another difference between conduit loans and traditional commercial loans is with the terms of early repayment. Investors make money on the loan’s interest, so if the loan is paid off early, they might lose money. The terms are structured to eliminate losses for paying the loan early.

Conduit loans can help investors make a lot of money. If you think they’re right for you, check with your local financial institution.