One of the first things to do if you are interested in investing in commercial real estate is to explore financing options. There are many different types of commercial real estate loans, and being familiar with them can help you to narrow your search. In addition to using loans to invest in a new property, loans can be used to renovate as well. Here are a few of the different types of commercial real estate loans that might be available to you.
These loans are similar to what you would get when purchasing a home. They come from any major bank, where they evaluate your credit history to determine your loan amount. Many people use these types of loans when looking to fund new commercial space. These lenders generally require a down payment of at least 25% in exchange for a 5 to 30 year fixed-rate mortgage. Although, these loans are typically more short term running from 5 to 10 years.
Private loans are also known as Bridge Loans or Hard money Loans. These have higher interest rates, shorter durations and are given to those with special circumstances. Such as, someone who is buying a fixer-upper or someone who is waiting to get a traditional or SBA loan. Bridge loans are short-term capital that is used until long term financing is available. They typically last 6 months to a year or two years with interest slightly higher than average. Bridge loans operate with interest only payments with a balloon payment at the end.
Hard money loans are similar to bridge loans in that they are for a short term with higher interest rates (10%-20%) and interest only payments. The main difference is that they are given by private companies and they have a higher down payment. Although, most of the time hard money loans can be granted and funded faster than bridge loans can. These are used in high risk situations where investors need to move quickly.
SBA loans are backed by the Small Business Administration and typically have stricter qualification requirements. There are two different types of SBA loans and both are given by most big banks. The SBA 7(a) loan is the most common. These are for new and already existing businesses looking to purchase, refinance or renovate owner-occupied properties. The property must be at least 51% owner-occupied. Which means the investor uses at least half of the space for his own business, and a tenant uses the other half. These loans run for 10 to 25 years with a 5% to 8.75% interest rate. Additionally, SBA 7(a) loans require 10% of the purchase price as a down payment and a credit score of at least 680.
The other type of SBA loan is SBA 504 loans. These are similar to the SBA 7(a) loan, except it can be used for up to 90% of the purchase price. They typically last 20 years with interest rates between 3.5% and 5%. SBA 504 loans are made of two loans: one loan from a Certified Development Company (CDC) for up to 40% and one from a regular bank for at least 50%.
Commercial real estate financing can seem overwhelming at times. If you need any help understanding these loans or searching for the right one for you, contact us!