If you are ready to venture into the realm of commercial real estate investment, now is a good time to gain a better understanding of commercial real estate financing basics. By doing this, you can determine if this industry is a good fit for your goals.
Along with working with an industry professional, such as Charles Rial, keep the information below in mind.
Understanding the Commercial Property Loan
A commercial property loan is a mortgage designed specifically for someone who wants to buy commercial properties.
Something is considered a commercial property if it produces income and is used strictly for business purposes. One example of a commercial property is an office or retail space where a business is operated.
To purchase this type of property, you must choose from one of the many financing options provided to commercial real estate buyers. While this is true, you should also be prepared to guarantee the mortgage you receive through a lien (i.e., collateral). If you do not meet the loan’s repayment terms, the creditor has the right to seize your property.
You should also note that commercial property loans are given to business entities rather than individuals. Put simply, financing any type of commercial real estate is something that will usually require you to form some type of business entity. This can be a limited liability company, S-corporation, or something else.
Financing Options for a Commercial Real Estate Investment
If you want to understand financing commercial real estate fully, you must know what financing options you have. Knowing what the options are will help you figure out which one best suits your needs.
A commercial property loan will finance the property and can fund future construction projects when necessary. Additionally, investors can leverage bigger financing opportunities to help ensure their owned properties remain properly maintained and fully operational. This will help them ensure the property remains fully occupied.
There are several financing options for commercial real estate. Various financial entities can provide these loans. Some of the most common can be found below.
The SBA 7A Loan
This loan is provided by the Small Business Association (SBA). In fact, the SBA is known for offering some of the most affordable loans for commercial real estate. It will also guarantee a portion of the loan. Acquiring an SBA-backed loan will help you increase your credibility and reduce the lender’s risk.
The 7A loan will work well for any smaller project. They are also the fastest and easiest of all SBA loans to apply for and get approved for.
The SBA 504 Loan
This is another Small Business Association Loan. With this option, you can purchase larger properties or invest in bigger projects. They are the ideal lending tool for investments that are valued at $1 million or higher.
As the investor, you must put down 10% of the total amount of the loan. Then, 40% will be provided by the SBA Certified Development Company. A lender provides the last 50%.
Conventional Bank Loan
Many commercial real estate loans will be received from banks. Keep in mind, though, that a bank wants to lend to those with a strong credit history. It is best to have a minimum credit score of 660 and to have a mid or large-sized project in the works.
A bank loan will provide you with more competitive interest rates, and you do not have to worry about occupying any part of the property you plan to purchase. While this is true, most of today’s bank loans will require that you put down a minimum of 20%. You may also face penalties if you repay the loan early.
Hard Money Loan
If you are searching for a fast solution for commercial real estate financing, you may consider a hard money loan. Usually, hard money lenders will provide shorter-term loans at higher interest rates. They will also evaluate the loan based on the property’s perceived value rather than the borrowers’ credit history.
Sometimes, hard money loans are needed for fast financing when still negotiating a longer-term bank loan. Due to this, a hard money loan is sometimes called a “bridge loan.”
Getting the Right Financing Option for Commercial Property Purchases
If you want to invest in commercial real estate, finding the right financing option is a must. As seen from the information above, there are several options to consider. These provide a viable option to get the funds needed to provide you with the real estate that you want and need.
Keep in mind that the lender you choose will impact the terms of the loan you receive. Take your time to find the right lender to ensure you get the desired results for your commercial real estate purchase. Being informed is the best way to get the loan needed for any commercial property investment.