Types Of Commercial Real Estate Loans

What You Need To Know About Commercial Loans

Even if you are able to earn money from a property, not all aspects of real estate can be considered as “commercial”. It should also be noted that real estate bridge loans are not designed especially for the construction of a road extension, but rather as a physical bridge that can be inserted into a construction loan. What about the blanket loans, I hear you say. Well, they aren’t that warm at the end of the day.

Moreover, the convolutions don’t stop there. In fact, there are as many varieties of commercial property loans available as there are commercial real estate categories; therefore, causing a great deal of confusion. Allow us, TheTexasMortgagePros.com, to walk you through the different commercial real estate loan types, and to point out the various do’s (and don’ts) to qualify as a profitable property to lenders or banks.

What Are The Types Of Commercial Real Estate Loans?

#1: The Long-Term Commercial Mortgage With Fixed-Interest

The traditional commercial real estate loan from a lender or bank operates similarly to the home mortgage, but it has shorter terms with broader uses. Instead of offering a 30-year loan repayment schedule, the real estate loan will rarely exceed a repayment schedule of 20 years. In fact, most of the loans fall in the repayment schedule of 5 or 10 years. This type of loan also requires a personal FICO credit rating of 700 and above, one year in business, and at least 51% occupancy of the property by the owner’s company.

The interest rates in this type of real estate loan typically sit between 4.75% and 6.75% with a variable option. This means that the interest rate can move either up or down dependent on the real estate market trends. Using a fixed-rate real estate mortgage loan, the payment schedule and interest rate remains stable.

#2: The Interest-Only Payment Loan

Interest-only payment loans are well-known as “balloon loans”, and are commonly used by companies expecting large payouts at future dates. The payment schedules are made using smaller interest amounts with the larger “balloon” payment scheduled for payment at the end of the agreed-upon term, often between 3 and 7 years. Companies often use this type of loan when building up, or literally building, a commercial property as it is useful for refinancing as an end-term lump sum.

#3: The Refinance Loan

Similar to a home mortgage, company owners tend to take advantage of commercial real estate loans with lower interest rates. Typically, further costs and fees are involved when refinancing the loan; however, these are often minimal as compared to savings via a low monthly payment. Consequently, refinancing can increase the profit flow for a company either through expansion of commercial real estate or improvement of the properties.

#4: Hard Money Loans

While many types of financing come from banks, you can only secure a hard money loan from a private investor. The investors that give out these loans don’t focus on the credit score of the borrower that they’re lending to; they look at the value of the commercial property and take lending risks accordingly. Since these are short-term loans that require fast payment, the interest rates on these loans tend to be very high. Beyond the upfront fees, it’s common to see interest loans between 10% and 18% over a period between six and 24 months. Property investors that are focused on house flipping tend to be big fans of these loans.

Similar to a home mortgage, company owners tend to take advantage of commercial real estate loans with lower interest rates. Typically, further costs and fees are involved when refinancing the loan; however, these are often minimal as compared to savings via a low monthly payment. Consequently, refinancing can increase the profit flow for a company either through expansion of commercial real estate or improvement of the properties.

#5: Bridge Loans

Bridge loans are similar to hard loans in many ways, but the terms tend to be longer and the interest rates tend to be lower. It’s common to see interest rates between 6% and 9% and terms as long as three years. Loan applicants typically have to wait for their loan to be approved before they receive their funds. This period takes between 15 and 45 days. In order to secure one of these loans, banks will generally require that applicants have a minimum credit score of 650, as well as the funds necessary for a down payment between 10 and 20%. It’s common for short-term investors to use bridge loans to cover the cost of construction work and remodeling before refinancing.

#6: Construction Loans

These loans are used to cover the costs associated with building commercial structures, such as industrial buildings, rental units, offices, and retail shops. The funds typically cover the cost of labor and materials. If an investor has purchased undeveloped land to build on, it can be used for collateral. Using building materials as collateral for the loan is also an option. Typically, the terms for a construction loan last for 18 to 36 months. After the loan has ended, applicants generally transition into a mortgage with longer terms.

#7: Blanket Loans

These loans are used to cover the costs associated with building commercial structures, such as industrial buildings, rental units, offices, and retail shops. The funds typically cover the cost of labor and materials. If an investor has purchased undeveloped land to build on, it can be used for collateral. Using building materials as collateral for the loan is also an option. Typically, the terms for a construction loan last for 18 to 36 months. After the loan has ended, applicants generally transition into a mortgage with longer terms.

The World Of Commercial Real Estate

The term “commercial real estate” can be used to describe any type of structure, building or land that can be used as a revenue stream. Generally speaking, buildings in which the owner’s business has an occupancy rate above 50% are a higher chance of qualifying for loans, since the bank will be able to see that the applicant has a strong investment in the property. Read on to learn more about some of the properties that qualify as commercial real estate.

Apartment Buildings

Apartments, condominiums, and townhouses can only be described as commercial real estate if there are more than five living units. If a property has four units or less, it’s not classified as a commercial building, and a personal loan can be used to purchase it.

Office Buildings

Office buildings that are located in urban areas tend to be in high demand, but they also tend to be fairly costly. You’ll find lower prices once you move away from urban areas. In some cases, startup companies opt for a building away from these prestigious areas to save money.

Retail Structures

Strip malls, which typically house several small businesses and an anchor retailer, regional malls, which are usually home to many shops and multiple anchors, and standalone shops are all different types of retail structures.

Medical Buildings

There are many different types of medical buildings, including doctor’s offices, hospitals, urgent care centers, nursing homes, and surgical centers. All of these facilities offer different services.

Industrial Buildings And Warehouses

Typically, these structures are found outside of major cities in areas where it is easy to access and transport products and materials. These facilities can be used in many ways, including light assembly, heavy manufacturing, storing goods, or for multiple purposes.

Resorts And Hotels

This category is a large one. It includes small motels, larger hotels with amenities, luxury resorts, extended-stay facilities, independently-owned inns, major chains, and casinos. These buildings require a lot of paperwork, and there are numerous regulations to follow, which makes them less than ideal for people that are new to commercial property investments.

Land Developments

Land development is a popular option for commercial real estate investors. This process involves taking undeveloped land and transforming it into a space that can be used for construction in the future. This type of property typically requires a small upfront investment, and the potential returns can be massive.

Other Commercial Loans

It’s common to see people switch between using the terms “commercial loan” and “commercial real estate loans.” Sometimes, people are discussing loans for a physical property, while on other occasions, people are talking about working capital. You’ll want to be aware of that distinction as you try to learn more about commercial loans.

Term Loans

Term loans are one of the most common types of business mortgages. When someone applies for one of these loans, they’re hoping to borrow a sum of money that will then be paid back over a period of time. The terms of the loan can vary. Some loans are short-term and can last for as little as three years. Other loans are longer and duration; loans can last for more than 20 years. No matter what the terms of the loan are, the loan will have a predetermined payment schedule in which the borrower makes payments each month. It can be hard to qualify for a standard term loan from a bank if you have credit issues. However, marketplaces and online lenders generally have more relaxed standards.

Business Credit Lines

A credit line for a business typically functions similarly to a credit card. The money needed for the business can be drawn at will. As long as a borrower hasn’t used up all of their available capital, they’ll have funds on hand that they can use to make investments, purchase equipment, or cover emergency expenses. Best of all, it will be possible to access these funds without having to go through the loan process again. A credit line is a great fit for any business with ever-changing needs.

Government Business Loans

It’s possible to secure a small business loan from the United States government. There is actually a government division known as the Small Business Administration. There are many different types of SBA loans, and the interest rates for these loans tend to be lower than what you would find anywhere else. The SBA is able to offer loans through banks by guaranteeing that the loan will be repaid.

In Conclusion

There are loans for any and all types of commercial real estate ventures. In fact, because of online lenders, borrowers now have far more ways to secure capital than they did in the past. Because an owner-occupied piece of commercial real estate can serve as collateral, the interest rates for these loans tend to be lower than virtually any other type of business loan. They’re a terrific option for a small business owner that’s looking for an entry point into this sort of investment.

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