When investors consider purchasing commercial real estate (CRE) or upgrading a current property, they’ll likely consider applying for a loan. CRE lending offers investors multiple lending options to suit their needs. However, navigating this vast landscape can be challenging, especially if you’re starting out in the CRE space. So, how do you navigate these loans?
The best way to navigate commercial real estate loans is to do your research. Not all types of loans are suitable for all investors or business owners. You need to understand how to get funding, the terms of lending, how to qualify, and understand the CRE loan rates.
Business owners can acquire a commercial loan from various institutions like banks, insurance companies, and private lenders. Unlike residential real estate, CRE mainly focuses on generating revenue. Acquiring funding for commercial property is not always easy, but knowing how to navigate the application process is vital to successfully obtaining a loan.
How To Get A Commercial Real Estate Loan?
There are many different ways investors can obtain commercial funding. But it’s important to note that these types of loans are made to businesses and corporations, so you won’t be able to apply for it in your personal capacity.
Applying for a commercial loan is a step-by-step process, and you may not get accepted when you first apply. However, there are many lending options available to investors, and if you aren’t approved for a specific type, you can always move on to another.
To get CRE funding, consider the following steps:
- Be clear about your goals. To clarify your investment goals, ask yourself a few important questions like, How much money do I need? How long will it take me to pay off the loan? What are my current finances like? Will I apply for long or short-term financing?
- Determine how you will use the money. Are you going to use the money to renovate an existing property? Are you going to buy a block of apartments? If you are building or renovating, what’s your plan? How will you use the money, and what do you estimate the costs to be?
- Choose a property. When looking for a building to purchase, make sure you consider a few options. Conduct research and apply due diligence before you apply. If you’ve chosen a property that doesn’t seem like a lucrative investment to the lender, you may not receive funding.
- Decide on the type of loan. Once you know which property you’ll invest in, you can choose what financing to apply for. There are many different options, including hard money, construction, SBA real estate, and refinance and purchase loans.
- Find the right lender. Look at different lenders and consider all your options. Look at what criteria you need to meet to be approved. Institutions will look into your credit history, your debt-to-revenue ratio, and a few other things before they approve your application.
- Complete the application form. Applications are lengthy, and you may be required to submit supporting documents like business information and tax returns. During the review or application process, the lender may ask for more documentation, so be ready to submit anything they request. This increases the likelihood of you receiving the financing you need.
How Long Are Commercial Real Estate Loans?
When you apply for commercial property funding, you may expect to pay it off within 30 years, the same time it takes to pay back a mortgage on a residential building. However, the terms when lending for CRE are not the same for residential properties.
Money lent for commercial buildings needs to be settled between 1 to 10 years, while others can take 15 to 25 years.
Is There A Down Payment Required On A Commercial Loan?
Most commercial property lending requires a down payment except if they are short-term. The down payment is between 10% and 30% of the equity on the building being purchased.
Down payments can vary and often depend on factors like what the lender is willing to accept, the funding you’re applying for, and the building you want to renovate or purchase.
If you apply for funding through an SBA loan, you may only need to put 10% towards the down payment. Commercial buildings are large properties, so you can expect to pay a larger down payment compared to a residential property.
How To Qualify For A Commercial Real Estate Loan?
Lenders look at many factors before approving funding for commercial property. These are generally the same no matter which lender you choose, and include the following:
- Good credit score. An investor’s credit score is one of the most crucial factors that lenders consider when you apply for a loan. To qualify, you need to have a credit score that is between 640 and 700.
- Security. Lenders want to have some reassurance before approving financing for your property. This means the investor needs to have between 25% to 30% equity in the building. They will also check if you have property insurance and check the title of the property before determining if you qualify.
- Income and expenses. Lenders take into account your income and your expenses before approving a loan. They want to ensure that your income is sufficient to meet the monthly payments. Lenders may also request documentation relating to your income, including tax returns.
- Collateral. Collateral would be any assets that the lender can seize if the investor can’t make their monthly repayments. When you apply for business funding, lenders generally require some kind of collateral before approval.
What Are Commercial Real Estate Loan Rates?
The CRE loan rates are between 5.38% and 15%, but this depends on the type of financing and the type of building. Private lenders can have rates of 7% to 12%. This rate varies depending on numerous factors, including the property’s location, debt service coverage ratio, type of property, and the loan to value.
Here’s a quick overview of what rates to expect per commercial property type (2023):
| CRE Properties And Their Loan Rates | |
| Hospitals | 5.37% – 11.50% |
| Industrial | 5.38% – 15.00% |
| Multifamily | 5.87% – 15.00% |
| Hotels | 5.38% – 14.50% |
| Self-storage | 5.87% – 15.00% |
| Mixed-use properties | 5.38% – 15.00% |
| Retail | 5.38% – 15.00% |
Conclusion
Navigating CRE loans is not as complex when you have all the necessary information. Finding an excellent property to invest in and having a good credit score, a sufficient amount of income, and a good track record of investments will be beneficial in helping you acquire a CRE loan.