What You Should Know About Commercial Real Estate Lending

What You Should Know About Commercial Real Estate Lending

If you are looking for a way to diversify your investment portfolio, commercial real estate is typically a lucrative investment. Not only do you build wealth through physical assets, but you earn a passive monthly income. If you have considered investing in commercial properties, these are a few things you should know.

Property Types

Commercial properties include office, industrial, retail and special-purpose spaces. However, they also include multifamily properties, such as townhomes and apartment complexes. Office spaces are typically the most common commercial investment. Industrial spaces include anything from warehousing to manufacturing facilities. Special-purchase properties include storage, churches, and other properties with special requirements, such as car washes. Location is often the highest priority for those who invest in commercial properties.

Loan Types

Commercial real estate can be financed through several loans. First, you can secure the loan as an individual or as a company. Most commercial property is acquired by businesses, such as corporations and developers, but individual investors also have great options. However, investors or business owners may need to provide loan security.

Commercial property can be financed using conventional loans from financial institutions, such as banks. These loans don’t typically have maximum values, but they have other stringent requirements. For example, you can only borrow 65-85% of the property value, leaving you with a high down payment. You may also consider Small Business Administration loans. The SBA offers loans ranging from a maximum of $350,000 to a maximum of $5 million.

Commercial bridge loans offer short-term coverage (3 years or less) in cases where you want to make a purchase but haven’t gained approval from a traditional or alternative lender. You may also pursue hard money loans. These short-term loans have high interest and fees and only lend 60-75% of the property value. However, approval is easier and typically occurs within a few days. 

Loan Considerations

To gain a loan, your personal and business finances will be evaluated. You will also have to prove the loan will be profitable by calculating the loan-to-value ratio, which measures the loan against the property’s actual value. Most lenders require the loan to be no more than 65-80% of the property value. The debt service coverage ratio will also be scrutinized. You see, your lender needs to know the loan can be paid by the income you make on the property. A professional business plan may also help you get a commercial real estate loan.

If you hope to invest in commercial property or expand your operations using a commercial loan, do your research and learn about all the options you have as well as what you need to do to qualify for each loan. Then, choose the best option for you.