Before you consider investing in commercial property, you need to understand the financing options available. Understanding the types of commercial real estate loans available is vitally important to your investment success.
Commercial real estate loans are more complex than conventional residential mortgage loans. If you want the best chance of financial success, you need to know what to expect when investing. Let’s look at the different types of commercial real estate loans and how they are typically used.
5 Common Types of Commercial Real Estate Loans
Understanding the commercial loan process is of vital importance if you want to invest in commercial real estate. Generally, the different types of commercial real estate loans fall into three categories:
- Loans for investment
- Loans for development
- Loans for businesses
The commercial real estate industry is vast and complex. Let’s narrow down the lending process and explore the most popular types of commercial loans.
1. Conventional Commercial Mortgage Loans
Conventional commercial loans are closest to a single-family residential mortgage loan but with shorter terms. Many commercial real estate investors use traditional, fixed-rate mortgages today. To qualify, lenders require investors to have a credit score of 700+ and a 25% down payment.
Most conventional commercial mortgage loans fall within a 5-10 year term range. They are commonly used by investors looking to buy an existing, occupied asset with positive cash flow.
2. Commercial Bridge Loans
Short-term investors use commercial bridge loans to cover debts obtained by renovations or construction costs before improving, refinancing, leasing, or selling a property. These loans have lower interest rates, generally rangings from 6.5% to 9%. Investors must have a credit score of 650 or higher and cover 10-20% of the down payment.
3. Commercial Hard Money Loans
Like a bridge loan, commercial hard money loans come from private investors willing to take a lending risk based on the commercial property’s value. Hard money loans provide short-term financing in high-risk situations. Loan terms range from six to 24 months and carry interest rates as high as 18%. A great example of using a hard commercial loan is when investors purchase and flip properties.
4. SBA Loans
There are two types of small business association loans used by commercial real estate investors. SBA 7(a) loans are the most common. They’re used to help a business purchase or refinance an owner-occupied commercial property valued up to $5 million. To qualify, you must put at least 10% down, have a credit score of at least 680, and be in business for at least three years.
SBA 504 loans are similar but don’t have a maximum loan amount. SBA 504 loan terms are typically 20 years, with interest rates ranging between 3.5-5%. As with SBA 7(a) loans, owners must occupy at least 51% of the property to qualify.
5. Commercial Blanket Loans
Finally, commercial blanket loans are for investors with multiple properties who wish to roll their financing into one arrangement. Blanket loans offer convenience and flexibility but are complex and hard to obtain.
Talk to a Financial Advisor to Find the Right Commercial Real Estate Loan for You
With over 30 years in business, All American Financial Services can help you choose the right option for financing or refinance in Palmdale. Give us a call today to discuss your next investment.