How to Finance Your Commercial Property Purchase

How to Finance Your Commercial Property Purchase

Did you know that the average return on investment (ROI) for commercial property is around 10%? Commercial property is a property for business purposes, and it has at least 5 units.  

Some common types of commercial buildings include apartment complexes, office units, and strip malls. Owning commercial property is a great way to start your own business or make an investment. 

If you are ready to invest in commercial property, the first step is to get commercial property financing. Keep reading to learn all about commercial property loans and how you can get started today. 

What Is a Commercial Property Loan?

Commercial property loans are loans meant for people that want to buy commercial property. These loans allow you to buy any property that generates an income.  

Commercial property loans are like residential home loans. The borrower handles paying the loan monthly, and if they don’t, the lender can take back the property. 

Keep in mind that you will need a business entity if you want to take out a commercial loan. You can’t get a commercial loan in your name, so you will need to form a business first. 

In addition to buying existing commercial properties, borrowers can get a commercial property loan to build a new building or make renovations. 

Common Types of Commercial Property Loans

Like other types of loans, commercial property loans come with different interest rates, loan terms, and other loan options. Before choosing a commercial loan, business owners should weigh their options.

There are several different places to get commercial property loans. Some of the best places to get commercial property financing include banks, financial institutions, private lenders, and the Small Business Administration. 

If you want to work with a real estate advisory firm that can also provide financing, click for more information. 

Here are some of the most common types of commercial property loans:

Conventional Bank Loan

One of the most common types of commercial property loans is conventional bank loans. This is the type of loan that most people use to finance their house, but they also work for commercial property. 

Conventional bank loans are one of the most difficult to qualify for. In addition to having good business credit, most banks require that the borrower has a good credit score. 

Because they have high requirements, they offer lower interest rates than some other types of loans. Some conventional loans need large down payments. 

SBA 7a Loan

Another common commercial property loan is the SBA 7a loan. This loan is granted by the Small Business Administration, meaning the government backs it. Of all the different types of commercial property loans, this is the most popular. 

You can use an SBA 7a loan to construct a new building, buy an existing building, or do renovations.

If you are thinking about applying for an SBA 7a loan, keep in mind that that the approval process is long, and if you have a down payment, you may be able to find a better interest rate somewhere else. 

SBA 504 Loan

Like the SBA 7a loan, the SBA 504 loan is also backed by the Small Business Administration.

What is the difference between an SBA 7a loan and an SBA 504 loan? The SBA 7a loan is best for small projects, while the SBA 504 loan is for bigger projects (over $1 million). 

To qualify for this loan, you have to put in 10% of the total loan amount. In addition to your 10%, a bank will invest 50% of the loan, and the Small Business Administration will invest 40%. 

Hard Money Loan

If you are in a hurry to get a commercial property loan, a hard money loan may be the best option for you. Many property owners use a hard money loan in the short term while they wait to qualify for a different type of loan. 

While you can get a hard money loan fast, they have higher interest rates and shorter loan terms. The amount of the loan is determined by the property’s value, so there is no consideration of the owner’s credit score. 

Online Marketplace Loan

If you are looking for the middle ground between a hard money loan and a conventional bank loan, you should look at online marketplace loans. While these loans have high interest rates and short loan terms, they are not as extreme as hard money loans. 

These loans are also called soft money loans. To find these loans, use an online marketplace to compare loans and choose the best one for you.

How to Get a Commercial Real Estate Loan

Now that you know what commercial property loans are and the most common types, how do you get one? To get a commercial loan, you first need to determine the type you need for your situation. 

Once you know what type of loan you need, find lenders that offer that type of loan. Be sure to compare interest rates, loan terms, and down payments. 

When you find a loan to apply for, the next step is to fill out an application. Most lenders will want to see your tax returns, credit score, financial books, income, and business plan. 

Once you submit the needed information, the lender will approve or deny your loan. How long it takes to get a loan will depend on the lender and the type of loan you are seeking. 

Are You Ready to Invest in Commercial Property?

Commercial property is a great investment to make if you want to run a business or make money. Because commercial property is expensive, most people need a loan. If you are ready to invest in commercial property, be sure to keep these loan tips in mind.

Did you enjoy reading this article on investing in commercial real estate? If you want to learn more about investing, check out the investment category for more helpful tips!

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