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Commercial Real Estate Financing

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Whether searching for a location for your new business or upsizing an existing operation, finding and financing real estate is an essential piece of owning a small business. Having the right location can really be crucial to your success if your business is based around in-person service, but finding the right home for your business can be difficult, especially at the early stages of work.

Many business owners have trouble paying for real estate in full at the time of purchase. Luckily, there’s no shortage of business financing options to help you launch your business. Commercial real estate loans, mortgage financing, and other small business loans help thousands of people each year to begin their small business careers.

What Is Real Estate Financing?

Let’s put it simply: real estate financing is the use of external funds (like a loan or investment) to buy, develop, or improve commercial property. Whether it’s a small retail store, a large office building, or an apartment complex, real estate financing can help business owners take the next step in their growth journey.

Real Estate Financing for Resale

If you are creating a business flipping houses, you should know that you may not qualify for some traditional mortgage loans. Most conventional mortgages available through banks are designed for home buyers and are backed by the FNMA (Fannie Mae). To qualify for these loans, you typically need to live in the home for at least a year. If you are trying to flip homes quickly to avoid property taxes and mortgage payments, a conventional mortgage will probably not work for you.

Another key to successful real estate investing is to eventually start accumulating enough business savings to pay for new real estate investments in cash. Every time you take out a loan, you will face origination, appraisal, underwriting, private mortgage insurance and other fees, which chip away at your profits. Furthermore, many properties that are best for “house flipping” are nearly condemned homes, which are unlikely to appraise.

In short, you can use real estate financing to get your home renovation business off the ground, but should eventually shift to funding your real estate investments with profits from other sales.

Real Estate Financing for Rental Property

Real estate financing for a rental property is often easier to tackle than financing a house to flip. Many new real estate investors opt to get a conventional mortgage and live on site for a year or two, along with their renters. However, as your business grows, you won’t be able to live in every house and may need to consider other options, including commercial real estate financing or purchasing properties with cash.

Commercial Real Estate Financing

If you are looking to finance a commercial property, there are options for commercial mortgages or other business loans. Often, acquiring or renovating a business space is a big step forward for small businesses, as real estate presents a major business asset.

Before deciding to purchase a commercial property, consider whether you would like your business to be in that location long-term and if you feel comfortable with the resale value in the neighborhood. Just like homebuyers, you will be 100% responsible for your property, including property taxes, utilities, and repairs, which may be covered in your current commercial lease.

If a commercial real estate loan is right for your business, here’s what you need to know about getting a loan.

How Do Commercial Mortgage Loans Work?

A commercial mortgage is used to purchase or refinance real estate that will be used for business purposes.

You can think of it like this: you borrow a certain amount – the principal – and over time, you pay it back with a bit extra, which we call the cost of borrowing or interest. The property itself acts as collateral, which provides some security for the lender. Remember, with us, the process isn’t as complicated as traditional lenders make it, and our team is always ready to help.

Types of Commercial Real Estate Loans

Commercial real estate loans are meant for business owners and franchisees, and can only be used to finance new commercial space or renovations. There are two main types of commercial loans: interest rate reset loans and balloon payment loans.

With an interest rate reset loan, your loan will have a fixed interest rate for the first few years, but will then begin to vary according to the market afterward. Interest rate reset loans tend to have longer terms than balloon payment loans.

A balloon payment loan has shorter terms and lower monthly payments, but once the end of the term arrives, the borrower will need to pay the outstanding balance of the loan.

Term Loans

If you were to go to a bank and apply for a regular business loan, you would be applying for a term loan. A term loan is simply a type of loan that is set to be paid off within a specific period of time with a consistent repayment amount. Funds from regular business loans can be used for a wide variety of business expenses, including buying real estate or renovating an existing property. You can get a term loan as a bank loan or online through a private lender.

SBA Loans for Commercial Real Estate

If you are a small business owner, some types of SBA loans can be used for purchasing real estate. CDC/504 loans are specifically intended for major, long-term investments like purchasing commercial real estate or constructing a new building for your business. SBA 7(a) loans are available in amounts up to $5 million and can be used for many different business expenses, including buying commercial real estate or renovating an existing property.

Commercial Real Estate Loan Interest Rates and Fees

Discussing the cost of commercial real estate loans, it’s crucial to understand there are two main components: interest rates and fees. The interest rate is the percentage of the loan you’ll pay over time in exchange for borrowing. Fees include any additional charges you may need to pay, such as application fees, appraisal fees, or prepayment fees.

At Credibly, we believe in transparency and we make sure you’re aware of all the costs associated with your financing.

Pros and Cons of Real Estate Financing

Pros of Real Estate Financing

Since the property itself can serve as collateral, business owners often don’t need to provide anything else to secure a loan as they would for a cash loan from a bank. However, some business owners may need to provide a personal guarantee for the loan or an extra asset for collateral if the lender is concerned about the business’s credit score. Real estate financing can have a lower interest rate than a traditional loan because the real estate protects the lender’s investment. You can use a commercial mortgage broker to find the best financing at the lowest interest rate for your real estate deal.

Another perk of owning property is the possibility of a home equity line of credit (HELOC). After you have paid down your mortgage, you can sometimes take out a loan called a HELOC, or a home equity loan, secured by the gap between the value of a piece of property and the amount you owe on the mortgage. Since HELOCs are a secured loan, you can avoid some of the higher interest rates of other loans down the road. It is important to note that a HELOC may not be an option if you are not using at least part of the property as your primary residence.

Cons of Real Estate Financing

One of the cons of real estate financing for businesses is that many of the residential loans enjoyed by homeowners are not available to businesses. For example, businesses cannot use a loan from the United States Federal Housing Administration (FHA loan) for purely commercial properties. Instead, business owners are restricted to specific commercial lending procedures.

Another hurdle to real estate financing could arise if you’re looking for a loan to purchase a property where you would lease some or all of the space out to other businesses. In some cases, you might not be eligible for some types of real estate financing. For example, CDC/504 loans backed by the SBA are only available to businesses that will be occupying at least 51% of a given property.

Additionally, commercial real estate loans often have restrictions against prepayment. If you choose a type of real estate loan that has shorter terms, you’ll most likely have to make a very large balloon payment at the end of the term. If you aren’t able to pay the full amount of the balloon payment at the end of the term, you may need to take out another loan to pay the balance, which is something many business owners may not be comfortable with. Generally, real estate financing for commercial purposes is something to consider carefully, and something you must prepare your business for before acting on.

How to Get a Business Loan for Real Estate?

Since real estate is such a large investment, applying for a real estate loan is a more complicated process than applying for a short-term loan. Since you’re interested in a property to be used to generate income, lenders are going to be very interested in seeing a detailed business plan.

The exact information you’ll need to provide on the loan application will depend on how you plan on using the property (example: if your business will be occupying the entire space or if you’re buying a property for the purpose of leasing it out to other businesses). However, you can expect to provide much of the same information that you would need to provide for any other type of business loan, such as:

  • Resumes for yourself and your partners or other principal employees
  • Copies of business and personal tax returns
  • Lists of individual debts and assets
  • Income projections for the next 3-5 years

Since you are dealing with real estate, you will need to pay for things like having the property surveyed and appraised. You may also need to have an environmental study done on the land.

Lenders will consider your loan-to-value ratio (LTV), which is related to the amount of your down payment. The LTV is the loan amount compared to the total purchase price of the property. For example, if you’re able to make a 20% down payment, that means the lender would be providing a loan for 80% of the property’s value. In many cases, lenders look for LTVs that are 80% or lower because a low down payment puts an additional risk on the lender.

Another thing lenders will consider is your debt service coverage ratio (DSCR). Your DSCR compares your annual net operating income (NOI) to your annual debts. This helps lenders gauge how much cash flow you are generating. Generally, lenders are more inclined to approve loans for businesses with a DSCR of 1.25 or higher.

How Can I Apply for Real Estate Financing?

Applying for real estate financing is simpler than you might think. Just hop onto our digital platform and fill out the easy online application. Don’t stress over credit scores or excessive paperwork. We assess your business from a broader perspective, valuing your potential above all.

And the best part? Our dedicated customer service team is here to help you through the process.

Frequently Asked Questions About Commercial Mortgages

In the simplest of terms, a commercial mortgage is a type of loan used to buy, refinance, or upgrade a piece of property for business purposes. The building, or the property itself, serves as collateral for the loan, meaning that if repayments aren’t made, the lender could take ownership of the property.

A commercial mortgage can be a versatile tool for a business owner. Maybe you’re looking to acquire new office space, a retail storefront, or a warehouse for your inventory. 

Or perhaps you’re thinking about renovating your current premises or refinancing an existing property to unlock some cash. 

In all these scenarios, a commercial mortgage could be just the ticket. Remember, we’re here to help you realize your business dreams.

Start by clearly defining your business needs and financial situation. Next, understand different loan offerings and terms.

Compare interest rates, repayment terms, and whether the loan has an is adjustable or fixed rate. Look beyond the credit score requirements and assess if the lender values your business potential. And most importantly, choose a lender who supports you and, not just your business.