How to Buy Commercial Real Estate with a Loan
April 25, 2022 | Last Updated on: February 7, 2023
April 25, 2022 | Last Updated on: February 7, 2023
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Social media is ablaze with real estate investors telling people that they can build a profitable business by investing in commercial real estate. Unfortunately, most of these posts are high level and don’t get into the nitty gritty details of how to actually buy your first commercial property.
Before you even consider investing in any real estate, it’s crucial that you put in the time to really understand the market. This means understanding the property types that fall into the category of commercial real estate, what your financing options are, how to value commercial real estate, current trends, and more.
As markets recover after several crazy years of disruption, it’s important to know that housing and multi-family properties are particularly lucrative right now, in part due to work from home policies and shifting population trends influenced by the pandemic. At the same time, other commercial properties, like office spaces and retailers, have seen a massive decline. In fact, many large retailers have declared bankruptcy during the pandemic.
Warehouses and other similar properties are also seeing a boom, as companies like Amazon work to increase their delivery coverage and improve their speed to meet online ordering demands.
Knowing these trends is vital when considering what kind of property to invest in. But before you even get to that, it’s vital that you have a strong understanding of the types of properties you can buy and the types of financing available to you.
Although office buildings are currently seeing lower occupancy rates due to the pandemic, more and more businesses are returning to the office full-time or part-time. This means that in the future, it’s possible that offices will return to their previous occupancy levels or at least near previous levels. It also means there might be good deals available right now, as prices may be down.
When it comes to buying office buildings, there are three main types to consider:
Usually located outside of city centers, industrial buildings like warehouses are almost always low-rise and expansive buildings. These types of buildings can include:
This is a broad category that can include:
Any type of real estate intended for residents, other than homes intended for single families, is considered multifamily real estate. This includes real estate with multiple housing units within a building or a complex of buildings.
Multifamily properties are more expensive than some other forms of commercial real estate, but with rent coming from multiple tenants, financing these properties tends to be easy to get, even compared with a traditional home loan.
Some common types of multifamily real estate include:
Depending on the area you’re looking at investing in, this can be a lucrative investment. Especially after travel restrictions were removed from the pandemic, tourist areas are seeing upticks in travel again that call for investment in the hospitality industry.
The hotel/hospitality category includes:
A plot of undeveloped land can be considered commercial real estate if the land is in an area that is zoned for commercial use and the buyer intends to use it in that way.
There are three types of land that a commercial real estate buyer can purchase:
While these types of commercial real estate are not the only options available, they are the most prominent categories. If none of these real estate investing opportunities are right for you, you could also consider self-storage facilities, churches, amusement parks, bowling alleys, car washes, theaters, nursing homes, community centers, or a host of other options.
Commercial lenders offer several types of loans that help business owners acquire investment property. Not all options are equally accessible, so before you go filling out loan applications, it’s worth getting a basic understanding of the most common types of loans and the eligibility requirements so you don’t waste time. For many commercial real estate loan options, you must be a business owner who has a good credit score, annual revenue of at least $250,000, and have a company that has been in business for several years.
While there are different ways to acquire these loans, Biz2Credit is one reliable source of funding that has helped others expand their businesses and investments, like Shirley Carson who received a bridge loan to invest in an apartment complex.
Here are the basic types of loans used for commercial real estate:
The U.S. Small Business Administration (SBA) offers commercial financing through its SBA 7(a) loan program. These loans allow businesses to purchase or refinance owner-occupied commercial properties. They also give the business owner a chance to borrow funds for working capital. And as an added benefit, they don’t charge origination fees and have good loan rates.
These loans are great for businesses that are unable to secure credit anywhere else. With an SBA (7a) loan, the borrower can buy land or buildings, build on new property, or renovate existing property as long as the real estate will be occupied by the owner.
To do this, an entrepreneur can borrow up to $5 million for the purchase price through an SBA-affiliated lender with an interest rate that can be fixed, variable, or a combination of the two. Loan terms for these commercial real estate loans can be as long as 25 years for repayment with each monthly payment staying the same for the duration of the loan.
Also backed by the U.S. Small Business Administration, these 504 loans are actually a hybrid form of financing. One loan comes from a Certified Development Company (CDC) for up to 40 percent of the loan amount, and one loan from a bank for half the loan amount or greater. The low down payment requirement of this type of loan makes CDC/SBA 504 loans perfect for growing companies that might not have more than 10 percent to use as a down payment.
Typically, this type of loan is for either 10 years or 20 years. Unlike, SBA (7a) loans that can be fixed, variable, or both, borrowers get a fixed rate when taking out a loan from the 504 loan program. However, applicants will be required to show the lender a business plan and projected cash flow data, as well as proof that they’re capable of managing a business entity.
Standard commercial lending through traditional lenders (like banks) is not backed by the federal government, however, borrowers use traditional commercial mortgages to buy commercial properties–or to refinance them.
Traditional commercial mortgages usually have loan interest rates between 5 percent and 7 percent, with closing costs ranging from 2 percent to 5 percent. Repayment terms could be as short as five years or as long as 20 years, with full amortization over the life of the loan.
It’s important to note that qualifying for a traditional mortgage is not as easy as other types of commercial real estate loans. They’ll be looking at your creditworthiness and examining your business to ensure that your commercial property loan is viable.
A short-term form of funding, a commercial bridge loan can help a company owner get the cash they need quickly. A small business might consider a bridge loan to keep the company solvent and able to pay its bills during a time when cash is scarce but invoices that are outstanding are on their way.
If a business is in the market for new real estate but lacks the time required to go through the process of securing a mortgage, a bridge loan can be a good solution.
This type of small business loan can also help cover expansion plans so that a growing company can hire more employees, search for more spacious accommodations or renovate their space.
Here is how Biz2Credit arranged a commercial bridge loan for this Texas-based real estate owner.
Commercial real estate financing can be expedited through a hard money loan from either a company or an individual and can be a faster way of securing financing than you would get if you went through the application process at a bank. The time frame difference between a hard money loan and a traditional loan from a bank could be from a week to a month or two.
Hard money loans are comparable to bridge loans, with one big difference: the down payment and interest rate on a hard money loan usually will be higher than a bridge loan, because of the higher risk of default. Keep these differences in mind as you make the decision to pursue financing.
A Commercial Mortgage-Backed Security loan is a permanent, fixed-rate commercial real estate loan. It’s a type of commercial mortgage loan that is packaged in a pool with similar commercial loans. Typically it is securitized and sold in the secondary market to institutional investors. The loans in the pool are held in trust and are considered the collateral for the mortgage-backed security.
One benefit of CMBS loans is that they offer lower fixed rates than traditional commercial real estate loans. Additionally, most of these loans have terms of five to 10 years with 20-30-year amortization periods.
Any business owner who occupies more than 51 percent of the commercial property may apply for any of these types of financing.
We covered a lot of ground in a fairly short article, but it’s not rocket science. As a basic rule of thumb, make sure you know the ROI on the property you’re interested in investing in, and then look for a loan option that makes sense within your timeframe. You don’t have to become an expert in commercial real estate financing to get a good deal—you just have to know the experts who can help you. So, find a reputable provider like Biz2Credit and talk through your options.