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Obtaining a real estate loan for purchasing, renovating one’s property, or refinancing real estate debt can substantiate profit margins in small businesses. Online lenders have outweighed the services offered by contemporary lending institutions. This is because they have consumer-friendly thresholds and their loans take less time to be approved. Nonetheless, numerous lending institutions are available in the market today and provide some of the best loans for real estate investors.
As such, it is recommended that before taking a real estate loan, one can gauge whether the profits will bring profits that will cover up the interest and loan fees. In addition, comparing the interests, terms, speed, and charges incurred can help one unleash the best real estate loans for their businesses.
What Is a Commercial Real Estate Loan?
Commercial real estate loans provide financing for purchasing or renovating commercial properties rather than residential ones. These loans are designated for corporations, companies, and organizations that possess and operate the commercial property. This includes properties such as hotels, offices, recreational parks, apartments, and industrial buildings, to name a few.
In this case, the property being financed stands in as collateral. Different lenders have distinct terms and rates when lending commercial real estate loans. Due to a higher risk margin, most lenders may require a down payment that is comparatively larger than one from residential property. Thus, the loans are comparatively more expensive than residential loans as down payments are approximately 20% to 30% of the purchase price. Interests are also higher, ranging between 10% to 20% for most lenders.
Commercial real estate loans can be obtained from banks, insurance companies, private investors, pension funds, independent personnel, and capital sources. These loans have a shorter repayment period ranging between five and twenty years.
When obtaining a commercial real estate loan, lenders scrutinize the status of the property being financed, the owners’ creditworthiness, income tax returns, and financial statements for several years.
Types of Commercial Real Estate Loans
There are numerous lenders with the best commercial real estate loans. However, based on the purpose of the loan, there are different types of commercial real estate loans as articulated below:
The name disseminates the sole purpose of the loan. Purchase loans are the best commercial purchase loans for people looking forward to purchasing property for their business. It can also be referred to as a commercial mortgage loan, and the property is used as collateral. Nonetheless, one can utilize other forms of collateral such as a deposit account, inventories, or other property owned by the company.
They are loan funds stipulated to finance the construction or renovation of a building or property. Construction loans can also be utilized in the expansion of a building. These loans have a shorter repayment period of about 18 to 36 months. Borrowers may want to also note that the lender does not fully give out the loan, but they design a schedule for partial payments.
One may have a loan that has higher interest charges and strict terms. Refinance loans can ease financial pressure as they have the best commercial property loan rates and lower monthly payments. Hence, this may help one to free up more cash that can be used to fund other projects and purchase more financial property.
Hard Money Loans
Hard money loans are available from private lenders and are considered strict and with high-interest rates. Depending on the lender, they have a short repayment period of 6 to 24 months. The reason why they are not available in banks and credit unions is that private lenders do not have much concern about the borrower’s credit score.
Bridge loans compare to hard money loans but have relatively lower rates and longer terms of up to three years. One can utilize bridge loans to aid in selling a property within the duration of the bridge loan or commencing construction. In addition, bridge loans can help borrowers improve their credit scores during the loan timeframe.
People with an existing property are prequalified for equity loans as the property enhances immediate access to cash funds. These loans have a wide variety of term options, and the lender gives out the loans in a lump sum amount. Equity loans can be used to purchase new investment property or finance business-related projects.
They are long-term financing loans that are backed up by the Small Business Administration. SBA loans are best for multifamily properties as they have low-interest rates and higher maximum qualification amounts. Rather than purchasing property, SBA loans can be used as working capital, purchasing machinery, and debt restructuring, among others.
What To Expect for Your Commercial Real Estate Loan?
Applying for a commercial real estate loan is considered one of the largest and imperative expenses for business growth. It helps in elevating profit margins by purchasing a new property, renovating and expanding commercial premises. There are different types of commercial real estate loans, as discussed above, and they have distinct loan terms and considerations such as:
Borrowers may encounter fixed or variable interests based on the lender or loan type. Fixed interests have a similar rate throughout the entire loan duration. Variable interests have rates that are subject to change over time.
People who are in for predictable payments can dwell on fixed interests. Conversely, borrowers who project that the interest rates will increase or decrease typically prefer the variable rates.
Lenders have different considerations of loan repayment periods. As a business owner, checking one’s business maneuvers may be imperative in gauging whether a certain repayment period can favor business growth. In addition, different commercial loan types have varying repayment periods. For instance, bridge loans have a repayment period of up to three years, while hard money loans have a shorter period of below two years.
Some lenders may allow other repayment schedules, such as balloon payments. This is whereby a borrower makes small payments before finalizing with a huge sum towards the end of the loan period.
The total estimated repayment amount
Numerous factors may impact the total estimated repayment amount. This may occur due to interest rates, process fees, delayed payment charges, down payments, among others. It would be wise if a borrower would scrutinize the total estimated repayment amount to have insights into the loan’s efficacy.
The real estate loan application process may take about 24 hours for online lenders and approximately three months for conventional funding institutions. Despite the unique procedures and thresholds incorporated in different lenders, there is a common application process for commercial real estate loans.
There is an application form that borrowers need to fill. It can be done online or physically at a bank. The form requires information regarding the owner and the business, such as:
Amount and type of loan, its designated usage, and collateral details.
Business identification entails name, address, launch year, and tax ID number.
Borrower name, home address, Social Security Number, title, and business shares.
Documents are also vital in the application, and they include official ID, bank statements for a certain period, business tax returns, business financial statements, and details on collateral.
Do I have to use a commercial real estate loan to buy a commercial property?
Though there are numerous options that one can utilize to purchase commercial property, real estate loans are considered the best. They have larger loan limits and payment structures that suit real estate projects.
What kind of down payment do I have to make on a commercial mortgage?
The down payments for commercial real estate loans depend on the lender and type of loan. Normally, they have a range of between 15% and 35%.
What fees and costs do commercial real estate loans have?
Commercial real estate loans have numerous fees such as original fees, loan application fees, survey fees, among other legal fees.
What kind of credit score is needed in a commercial real estate loan?
People with a credit score below 500 may find it quite hectic to gain approval for a loan application. However, some lenders do not highly consider the credit score status while reviewing loan applications.
How do I find a lender that will approve me for a commercial real estate loan?
One can conduct research online and review lending partners available in the market. Check their quality, loans, and terms to gauge whether they can approve the loan application.
What type of commercial real estate loans exists?
Borrowers can access a wide variety of commercial real estate loans, which include construction loans, purchase loans, finance loans, SBA loans, bridge loans, equity, and hard money loans.
What is a reasonable interest rate for a commercial real estate loan?
Most lenders have a loan interest rate averaging 10% to 20%. Hence, the lender with lower interest rates and favorable terms can be the most reasonable.
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