Commercial real estate loans can be an excellent way for investors to enter the property market. But, there are a few things you need to know before you borrow money for a commercial real estate purchase. In this blog post, we’ll take you through the basics of commercial real estate loans so that you can make an informed decision when it comes time to borrow.
What is a Commercial Real Estate Loan and How Does It Work
A commercial real estate loan is a mortgage loan used to finance the sale or refinancing of a commercial property.
Commercial real estate (CRE) refers to any income-producing property used for commercial purposes, such as retail stores, office buildings, strip malls, warehouses, and hotels.
Commercial Real Estate Loans vs. Residential Loans
One key difference between commercial and residential loans is that commercial loans are often interest-only, meaning that the monthly payments only cover the interest on the loan. It can benefit businesses expecting to see much growth soon and want to keep their monthly expenses low.
It also means the loan must be paid off in full at the end of the term. Commercial real estate loans have 5-10 years, although more extended periods are sometimes available.
Because CRE is considered higher risk than residential property, commercial real estate loans have higher interest rates and down payment requirements than home mortgages.
Where to Get a Commercial Real Estate Loan
Borrowers can get commercial real estate financing from banks, insurance companies, pension funds, commercial mortgage-backed securities (CMBS) issuers, and other institutional investors. Also, CRE investors often use private equity or mezzanine financing to supplement bank financing.
When considering a commercial real estate loan, borrowers should consider the amount of debt they can afford, the loan’s interest rate and terms, the collateral involved, and the lender’s reputation and experience. Borrowers should also be aware of the risks involved in CRE lending, such as changes in interest rates, tenant default, and environmental contamination.
When financing a commercial real estate purchase, many options are available. The type of loan best for a particular situation will depend on some factors. It includes the amount of money being borrowed, the terms of the loan, and the type of property purchased.
Types of Commercial Real Estate Loans
Some of the most common types of commercial real estate loans include:
These loans are backed by the Small Business Administration and are available to small businesses with solid credit histories.
Bridge Loans
Bridge loans are short-term loans that can be used to finance the sale of a new property before the sale of an existing property is completed.
Commercial Mortgage Loans
These are like residential mortgage loans, but they are used to finance the sale of more significant commercial properties.
Construction Loans
Construction loans are used to finance the construction of a new commercial property.
The type of loan that is best for a particular situation will depend on the specific needs and objectives of the borrower. A professional lender or financial advisor can help assess a particular situation and determine which type of loan would be best suited.
The Benefits of Using a Commercial Real Estate Loan
A commercial real estate loan has several benefits for businesses looking to purchase or improve their commercial property. There are several reasons why this type of loan can be helpful.
One of the main benefits is that it can help to reduce the cost of the project, making it more affordable.
With a commercial real estate loan, you can get insurance for your property. This insurance will protect you if something happens to the property, such as damage from a natural disaster.
A commercial real estate loan can allow you to finance the sale of the property over time, rather than having to pay for the entire sale price upfront. This can make it more affordable for you to buy a larger property or one that is located in a desirable location.
A commercial real estate loan can provide you with the financial flexibility and security you need to make a wise investment in commercial real estate.
Additionally, a commercial real estate loan can be used as collateral for other loans, providing more security for the lender. Another benefit is that the interest paid on a commercial real estate loan is often tax-deductible, saving businesses money.
Finally, a commercial real estate loan can help businesses to improve their credit rating, as timely repayments will be reported to credit. Commercial real estate loans can provide some advantages for businesses that are looking to buy or improve their property.
How to Get a Commercial Real Estate Loan
Obtaining a loan for commercial real estate can be challenging, but many options are available for business owners looking to finance their property. The most common commercial real estate loan type is conventional loans, which are available through banks and other financial institutions.
But, some government-backed programs offer loans for commercial real estate, such as the Small Business Administration’s 504 programs. Also, many private lenders specialize in loans for commercial real estate.
The first step in getting a loan for commercial real estate is to determine what type of loan you need. Many different loans are available, each with its own terms and conditions.
Once you have determined the loan type, you must gather the necessary documentation, such as financial statements and proof of income. You will also need to have a business plan in place to qualify for most loans.
Once you have all the necessary documentation, you can check for the best rate and terms.
What to do if you’re Denied a Commercial Real Estate Loan
If you’ve been denied a commercial real estate loan, you can do many things to improve your chances of getting approved the next time.
It’s essential to understand why you were denied the loan. Was it due to your credit score?
The property itself? The location? Once you know the reason, you can take steps to improve your chances of being approved for a loan in the future.
First, take a close look at your financial situation.
Make sure you have all your ducks in a row and that you’re in good standing with all your creditors. This will give you a better chance of being approved for a loan.
Second, consider refinancing your commercial real estate. This can help improve your financial situation and make it more attractive to lenders.
Finally, make sure you check around for commercial real estate lenders. There are many different lenders, and each has its requirements. You’ll increase your chances of finding one willing to work with you by checking around.
If you have any questions about getting a commercial real estate loan, don’t hesitate to contact JP Powell. We’re more than happy to give you a tip or two!