Whether you are interested in funding the acquisition, construction, or development of commercial real estate property, you are likely going to need to secure funding through commercial real estate financing.
In this blog, we’ll briefly look at the various types of commercial real estate financing available to business owners and investors.
Commercial Real Estate Financing Explained
The first thing you need to know is that commercial real estate financing is highly complicated. If you are interested in investing in commercial real estate, you need to understand the various aspects of this process. We’ll start with the basics.
First of all, no matter what reason the borrower has for seeing commercial real estate financing, there are several ways that the process is different than procuring a personal residential loan. These differences are based on the type of financing that is needed and how the funds will be used.
How to Qualify for Commercial Real Estate Financing
Typically, commercial real estate loans are scrutinized more than residential real estate loans. When evaluating a loan application for commercial real estate financing there are several factors the lender will consider.
Depending on the lender and the financing being sought, this can include collateral, the creditworthiness of the borrower, and financial ratios based on the characteristics of the property being purchased.
Borrowers will likely be required to provide several years of income tax returns and financial statements. Lenders may also wish to see financial information related to the cash flow for the property being purchased.
Real Estate Financing Options for Commercial Properties
Below, we’ll take a look at the four primary types of commercial real estate financing:
Hard money loan
Each type has advantages and disadvantages, as well as applications for which it is most suited.
Conventional real estate financing is the most like residential mortgage loans. They offer the longest terms, typically a 5 to the 10-year repayment schedule, and fairly low interest, typically 4.7 to 6.75%.
Underwriting often takes months, as lenders typically order a property appraisal and want to see financials for the borrower and the property. In addition, lenders often require a FICO score of 700+ and at least 1 year of business financials.
Hard Money Loans
In the world of commercial real estate, hard money lending refers to loans extended by private investors that lend money based on the value of the property. Typically, there is very little reference to the credit rating or financial standing of the borrower.
Since the underwriting standards are lower for this type of real estate financing, the funds can typically be secured in a few days or weeks instead of months. The terms are typically short, ranging from 6 to 24 months.
Since the standards are lower, the interest rates are much higher than conventional commercial real estate financing- and the up-front fees are usually higher.
This type of funding is often used to fix and flip property when you need quick financing or when the borrower doesn’t have the credit background to qualify for other types of financing.
The SBA offers two types of loans that may be useful for commercial real estate financing:
SBA 7(a) loan
SBA 504 loan
Since the SBA guarantees repayment on a portion of the loan, lenders charge lower interest rates.
SBA 7(a) is the most popular option. The funds obtained through these loans can be used in owner-occupied commercial real estate purchases, debt refinancing, working capital, and more. The maximum amount is $5 million and interest rates are typically 7% to 10%.
The SBA 504 doesn’t have a max amount. These funds can be used to purchase long-term business equipment or in the acquisition (purchase, build) or improvement of owner-occupied commercial real estate. The interest rate is 4% to 7% at this time.
Both of these options require collateral, a guarantee from anyone owning 20% or more of the business, and a 10% down payment. Terms depend on the purpose of the loan and there are pre-payment penalties.
A bridge loan is a short-term solution for commercial real estate financing. Terms range from 6 months to 3 years and rates are 6% to 9%. Typically, borrowers need a credit score of 650+ and a 10% to 20% down payment. The approval process is shorter than a conventional loan, at around 15 to 45 days. They are meant to be used as temporary financing while improving credit scores, completing an application for a longer-term loan, or building/renovating the commercial property.
As you can see, when you are looking for commercial real estate financing, you do have options. You can easily unlock opportunities with these commercial real estate financing options. Contact Sterling Capital Consulting to learn more about the funding you can obtain for your investments.