Commercial real estate remains the most active market globally with high investor interest. With current commercial real estate rates at record lows, now is a good time to invest. Government aid and a diverse pool of lenders also support the real estate market.
Even if financing is likely more affordable, you’re still gonna need the right loan to close the deal. There are different types of commercial real estate loans, each with risks and benefits. For first-time buyers, investing in real estate can be an intimidating prospect.
However, don’t let it stop you from buying the perfect property you’ve found! Let’s explore some of your commercial real estate loan options so you can get the ball rolling.
Types of Commercial Real Estate Loans
SBA loans, hard money loans, and other types of loans have different uses and rates. The commercial real estate loan terms also differ. Some of the common options for structuring the real estate deal are discussed below:
- Traditional Loan/Mortgage
The traditional loan is your standard commercial real estate loan offered by most banks and lenders. It’s similar to a residential mortgage, where the loan is secured by the property being purchased. The difference is that the repayment schedule is shorter, typically in the five to ten-year range.
It’s also harder to qualify for a conventional mortgage. You need to have a good credit score (700 or above) and a strong, well-established business.
- Small Business Administration (SBA) Loans
If you’re denied a traditional loan, SBA loans are good fallback options. There are two types: 7(a) and 504. Both types are fully amortized, which means that once you get the loan, each monthly payment will be the same until fully paid off.
The loan is provided by approved lenders. Both loans require the property to be owner-occupied and, in the case of SBA 504, your business must create jobs in the community.
- Bridge Loans
As the name implies, a bridge loan serves as a “bridge” until long-term financing comes through. They are mostly used for construction and renovations before a bigger, long-term loan is secured.
While the interest rates are a bit higher, the approval-to-fund wait and down payment is lower than traditional bank loans. Most bridge loans also have a shorter term, usually six months to two years.
- Hard Money Loans
Hard money loans are very similar to bridge loans but are arranged almost exclusively by private companies. These private investors are willing to take risks based on the value of the property. The credit-worthiness of the borrower is a secondary consideration.
Since the requirements (and terms) are less regulated, hiring a real estate lawyer is advised. It’s considered short-term financing and the rates and up-front fees are higher to reflect the risks taken by the investor.
Hard money loans are the preferred form of financing for property “flippers.”
- Blanket Loans
If you’re eyeing a large tract of land to be divided and sold, you might want to consider getting a blanket loan. A blanket loan covers multiple properties for flexibility and convenience.
It allows you to sell portions of the property without giving up the entire mortgage. However, the loan structure is complex and the penalties may be severe.
How to Get a Commercial Real Estate Loan Wisely
There are different types of commercial real estate loans for every business venture. Choose wisely because the future of your business is at stake!
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