Everything You Need to Know About Commercial Real Estate
When it comes to buying business real estate, it’s a lot different from financing a house. If you’ve gone through residential financing before, you should expect there to be differences in terms of commercial real estate. For beginners, it can be daunting, but fortunately, there is a simple guide to different business real estate loans.
Types of Business Real Estate Loans
When it comes to real estate financing, there are many options in terms of what is available for your business. The most common options include:
- Traditional mortgage loans
- SBA 7(a) Loans
- CDC/SBA 504 Loans
When it comes to a traditional mortgage loan, these loans will require the highest personal credit score and may require you to have more experience in the business. Since this financing isn’t backed by the government, the requirements and standards are a lot higher than the SBA 7(a) loan or the CDC/SBA 504 loan. The SBA 7(a) loan is most common among small businesses, whereas the SBA 504 loan is designed for commercial real estate.
Requirements for Real Estate Loans
With real estate loans, commercial lenders look at five different things:
- Personal credit score
- Net worth
- Business experience
All of these factors lend themselves to the lender’s final decision. It’s important that you meet the lender’s requirements.
Basics of Business Real Estate Loans
When it comes to real estate financing, the loan repayment terms are typically shorter than residential loans. Residential loans tend to last for about 30 years, whereas commercial loans do not. What you need to keep in mind is that if you have a longer repayment schedule, the interest rate is higher, whereas shorter terms have smaller payments but may end up with a balloon payment at the end.
For down payments, you probably will pay about 15 to 35 percent of the purchase price. Of course, this depends on the lender that you choose to go with. If you choose to pay on your loan ahead of time, you may also have to deal with a prepayment penalty. The price of these penalties varies by lender. Now, if you happen to go into default and have a non-recourse real estate loan, your lender can sell your real estate. Your assets aren’t at risk but your real estate is.
When it comes to commercial real estate, you can expect there to be a lot of differences than residential real estate. As with any type of loan option, however, you want to shop around to find the best options for you. With the different types of loan options, there are alternatives for every business owner.