Exploring commercial real estate (CRE) opens the door to unique investment opportunities. The key to building such assets is to begin with a commercial real estate loan. From there, you can acquire property and develop a commercial real estate portfolio. As long as you apply appropriate risk management strategies, you can build a compelling and diverse portfolio that leads to lucrative transactions.
Commercial Real Estate Lending Basics
Before attempting to file an application for a commercial real estate loan, it’s essential to learn the basics of the industry and its lending practices. Be aware there are various types of these loans available, and you need to know which plan best fits your goals. That means don’t just settle for the first lender that pops up on Google. Do some research on what different lenders offer, then narrow down your list.
What Is a Commercial Real Estate Loan?
While personal loans are made to suit the specific needs of individuals, commercial real estate loans are typically made to benefit entities, such as investment firms. In that sense, the evaluation of the borrowing entity is based on the credit history of its owners. CRE loans are offered for non-residential properties that are used for commercial purposes.
Keep in mind that a CRE loan is not the same thing as a “commercial loan.” While they may have overlapping meanings, it’s incorrect to use them as synonyms. It’s crucial to understand this distinction so that you can focus on the exact type of CRE loan that fits your investment plan.
Duration of Commercial Real Estate Loans
CRE loans can last from a few months to 30 years. These loans usually have a set monthly payment period for many years leading up to a large balloon payment. The repayment of a commercial real estate loan generally takes 5 to 20 years.
Clearly, real estate investors face significant risks when they take out these loans. The interest rate may change depending on the loan’s amortization length, in which the amortization period is longer than the loan period. So as a form of risk management, you need to determine a time frame for loan repayment that works for your organization.
Short-term loan options exist for individuals who don’t qualify for conventional CRE loans. An online marketplace loan matches borrowers with private investors and may last from six months to a few years. Another option is a joint venture loan, in which you partner with another entity to qualify for a loan. Usually, short-term loans come with much higher interest rates than long-term loans.
What Are Commercial Real Estate Loan Requirements?
Before applying for a commercial real estate loan, it’s advantageous to be very organized in your preparation and presentation for the lender. Here are some of the factors lenders analyze to determine whether you should be approved for a CRE loan:
- Established Business Entity – Make sure your business is set up properly in your state or local jurisdiction with regards to company structure and licensing. Lenders will be more favorable to entities that have been in business for many years vs. a startup.
- Credit Background – This credit history check of organizational owners seeks information on bankruptcies, foreclosures, and tax liens. As long as you don’t have these items in your background and you maintain a credit score of at least 680, you have a chance at approval.
- Low LTV Ratio – A Low Loan-to-Value Ratio reflects equity or collateral value when the loan amount is divided by appraised or purchased property value.
Like other types of business loans, the likelihood of getting approved depends on the financial standing of the applicants. Someone who can point to valuable assets as collateral has a better chance for approval than someone with limited assets.
Can You Get a Commercial Real Estate Loan with No Money Down?
Yes, it’s possible to get a CRE loan without making a direct downpayment. Nevertheless, it will be much more difficult to get a loan. One alternative is to pool resources with a joint venture. Another option is to apply for a bridge loan, which is a form of short-term funding.
How Long Will It Take to Get a Commercial Real Estate Loan?
Different financial institutions have their own time frames for loan evaluations. Still, the normal time within which a broker or lender will review a commercial real estate loan application can be anywhere from 45 to 120 days. Some firms might say they can do it faster, but it usually takes several weeks.
Calculating the Monthly Mortgage Amount
Once you determine your possible loan amount, you can calculate what the monthly mortgage amount will be. You will need to factor in the interest rate and the amortization term and whether or not you are expected to make a balloon payment and fill the details in an online mortgage calculator.
Calculating LTV Ratio
This metric compares the value of a loan with the value of a property. The LTV ratio is calculated by dividing the loan amount by the property’s appraised or purchased value (use the lower of the two).
While looking for a commercial real estate loan, do not make the mistake novices make, which is to rush into real estate investing without studying its complex world of nuances. Contact us at Northeastern Group, LTD to learn more about the safeguards you need in place to run a successful real estate investment business.
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