With so many funding options available for real estate investors looking to invest in commercial property, choosing the right funding option can be overwhelming. Understanding the different types of financing and securing the proper type of financing is crucial for success in the commercial real estate industry.
Are you trying to determine what kind of commercial real estate loan you need? Read on as we analyze the various financing alternatives available for your next commercial property investment so that you’re able to select the one that best suits your unique situation.
What Is a Commercial Real Estate Loan?
Commercial real estate loans are for investors looking to purchase commercial real estate income-producing properties. Companies and individual investors can use commercial property mortgages to buy new properties, renovate existing income-producing properties or refinance debt on commercial properties they already own.
How Do Commercial Property Mortgages Work?
Commercial property mortgages are granted to individual investors and business owners to purchase commercial properties that produce income and are used for business purposes. Since the commercial property is being used as collateral for the loan, your lender will have a legal claim on the property until the loan facility is repaid.
The loan amount is determined by the appraised value of the property and the lender’s required loan-to-value ratio. Like residential mortgages, a portion of your commercial real estate loan payments goes towards building equity in the property, while the other portion goes towards payment of interest to your lender. You will continue to build up equity in the property until you fully own the property.
What are The Main Types of Commercial Real Estate Loans?
Commercial real estate loans can take on many forms. Let’s explore the main types of commercial real estate loans and their advantages and disadvantages:
1. Small Business Administration (SBA) Loans
The government backs Small Business Administration loans, which can be used by small companies and newer investors to buy inventory, refinance debts and purchase real estate. You can obtain SBA loan financing for your commercial real estate investment through two major SBA loan programs:
- SBA 7(a) Loans
SBA 7(a) loans feature long loan terms of up to 25 years, funding amounts as high as $5 million, low down payments typically around 10-20%, and flexibility in using the funds. Some of the eligibility requirements are:
- Your business should mainly operate within the United States.
- Your business should have gross revenue of $100,000 or more.
- A credit score of at least 650.
- SBA 504 Loans
SBA 504 loans are a long-term form of a fixed-rate financing program that offers financing for major fixed assets that promote a commercial real estate business’s growth. A 504 loan has benefits such as:
- Its fees are capped at 2.65% of the loan’s value.
- SBA 504 loans are more affordable than other loan products due to their low-interest rates.
- SBA 504 loans can fund up to 90% of your commercial real estate project with a down payment of just 10%.
To be qualified for this loan, your business must meet the current SBA size standards and have qualified management experience, a feasible business plan, and the ability to repay the loan.
2. Bridge Loans
Existing property owners usually take out bridge loans looking to buy a new property while waiting on another property to sell. Commercial real estate bridge loans offer several benefits to investors, including; speed, flexibility, and the ability to buy new properties without capital constraints. The downside of this financing option is that it comes with short repayment terms, higher origination fees, and higher interest rates.
3. Permanent Loans
A permanent loan is a first mortgage on a piece of commercial property. Permanent loans feature an extended amortization schedule than other business loans and offer several benefits, such as lower interest rates when compared to bridge loans, longer repayment terms, and lower monthly payments. To qualify for a permanent commercial real estate loan, you will need a personal credit score of at least 600 and at least two years in business.
4. Hard Money Loans
Hard money loans offer benefits such as faster turnaround times, more flexible terms than traditional loans, and approval based on collateral rather than credit history. The downside of hard money loans is that they come with high-interest rates, and if the individual investor or company defaults, the property collateral may be taken away.
Maximize Your Commercial Real Estate Financing Potential with Unique Properties, Inc.
If you are planning to scale up your commercial real estate investment, then it is essential that you get the financing that is right for you and your situation. If you need help determining which type of commercial real estate funding is right for you, contact Unique Properties, Inc. today, and let us help you maximize your commercial real estate financing potential.
Image Credit: SaiArLawKa2/Shutterstock