Investing in commercial real estate can be attractive for many investors, but it often requires significant financial resources. Commercial real estate loans can help investors access the capital needed to purchase or refinance properties, but these loans come with unique considerations. This blog post will explore what investors should know about commercial real estate loans.

What are commercial real estate loans?

Commercial real estate loans are financing options used to purchase or refinance commercial properties, which include office buildings, retail spaces, industrial facilities, and multi-family apartment complexes. Banks, credit unions, and other financial institutions typically offer these loans

Types of commercial real estate loans

There are a number of types of commercial real estate loans, including:

  • Traditional commercial mortgages are long-term loans with fixed or adjustable interest rates used to purchase or refinance commercial properties. These loans typically have terms of 10 to 30 years.
  • SBA 7(a) loans: These loans are backed by the Small Business Administration and are designed for small business owners who want to purchase or refinance commercial properties. SBA 7(a) loans have more repayment terms than traditional commercial mortgages and may have lower down payment requirements.
  • Bridge loans: These are short-term loans used to bridge the gap between purchasing a new property and selling an existing property. Bridge loans are typically used by investors who need to close quickly on a property but do not yet have the cash available from selling another property.
  • Hard money loans: These loans are mostly used by investors who need to close quickly on a property and have less-than-perfect credit. Hard money lenders usually charge higher interest rates and fees than traditional lenders.

Considerations for investors

  • Before investors apply for a commercial real estate loan, there are several considerations they should keep in mind, including:
  • Creditworthiness: Lenders will review an investor’s credit history and score when considering a loan application. Investors with strong credit scores typically qualify for lower interest rates and more favourable loan terms.
  • Down payment: Most commercial real estate loans require a down payment of 20% to 30% of the property’s purchase price. Investors should ensure they have the cash available for the down payment before applying for a loan.
  • Loan terms: Investors should carefully review the loan terms, including the interest rate, repayment period, and any prepayment penalties. Investors should also consider whether a fixed or adjustable interest rate is more appropriate for their needs.
  • Property cash flow: Lenders will typically evaluate the property’s cash flow to ensure it can support the loan payments. Investors should review the property’s financial statements and projections to ensure they are realistic.

Conclusion

Commercial real estate loans can provide investors with access to the capital they need to purchase or refinance commercial properties. However, investors should carefully evaluate their options and consider their financial situation and goals before applying for a loan. By doing so, investors can make informed decisions that support their long-term success.