Commercial Real Estate Loans: The Playbook for Small Business Owners Looking To Expand

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Commercial Real Estate Loans: The Playbook for Small Business Owners Looking To Expand

Commercial real estate GoKapital

Expanding, renovating, or buying commercial real estate is a huge move for any entrepreneur. Yet, as exciting as it can be to picture your business growing, it can also be very frightening and stressful to take such a huge economic risk.

This guide will give you all the essential information you need to learn how commercial real estate loans work. You will find out how this form of funding differs from Residential Conventional Loans, what are the five main types of commercial real estate loans, and we´ll recommend a trustworthy lender to help you make the most out of your investment, cut the amount of paperwork, and get the best terms and rates for your loan. Let’s get started:

What is a Commercial Real Estate Loan?

A commercial real estate loan, also known as Commercial Business Mortgage loan, is a form of financing that enables business owners to access the funds to make renovations, purchase a new commercial property or both.

Commercial Real Estate (CRE) is exclusively used for business activity and money-generating purposes such as office complexes, apartments, retail centers, and hotels. The property or goods acquired with the loan will act as collateral for the credit provided.

What are the differences between Commercial and Residential Real Estate Loans?

Both types of loans share some similarities; they are both taken out on the property and are also used as collateral. Nonetheless, despite being alike in that sense, there are key differences between them that set their rules apart.

First, a residential mortgage is usually taken between the bank and an individual buyer, commercial real estate loans are made to the company.

If you have taken a residential mortgage you know the bank looks at your income, credit history, and financial obligations. The compliance that needs to be met is very strict and specific.

In the case of commercial loans, banks will not take those things into account, but the business itself is what will be evaluated for approval. It will be considered whether the property you are looking to buy can sustain itself in case you default. Also, how much income is there coming in to cover the cost of the loan.

Residential loans typically come with more favorable terms, there are no prepay penalties, they have lower interest rates, longer rate locks, and longer amortization schedules. This is because there is a smaller secondary market for commercial loans.

On the other hand, commercial loans are more flexible than home mortgages, since most residential loans are provided by the government they have a rather specific set of rules. Commercial mortgages allow lenders to create customized plans that serve the borrowers’ needs because they don’t require the government’s stamp of approval to pass.

However, if you’re looking to get the loan from a bank keep in mind that unlike a residential mortgage, where a lender will want to see that your income just matches your monthly loan repayment amount, with a commercial loan, the bank will want to see if the income covers your costs plus an extra 25%.

While commercial loans can be notoriously difficult to obtain with regular banks, an alternative lender can make it as easier and as painless as possible, they usually put a great deal of energy into understanding your venture so a good payment plan that works for you and your business can be set in place.

5 Types of Commercial Real Estate Loans

Now that we have seen the differences between commercial and residential loans, let´s take a look at the five main types of commercial real estate loans available to you:

Private Commercial Property Loans

As mentioned, private or alternative lenders allow both parties to come to convenient terms; there are a lot less lending requirements as compared to banks. Funding is secured rapidly, the qualification process is less time consuming and it can be the perfect solution for businesses that don’t qualify for normal financing options.

Jumbo Loans for Investment Property

These types of loans are usually for risk-taking investors. There is a common roadblock into getting an investment property and that is the need for large down-payment. Since investment properties do not get mortgage insurance coverage, it’s usually required to pay 20% of the purchase price or more. Big funding for investment property is usually found online through mortgage providers, national banks and Investor-only lenders.

Fix and Flip Loans

This is a strategy used by many investors, it consists of a very simple concept; you buy a house that needs work done, fix it up and sell the property. House flipping is quite a popular practice, most likely because of the fact that it can be very profitable. Research from Attom Data Shows House Flippers Renovated More Than 200,000 Homes in 2017; the average profit was $68,143. However, it is not always easy to get enough capital to buy the property, pay for improvements and find the proper buyer. Here are 3 popular funding options for this practice:

Hard money loans

Used by experienced investors. A Hard Money Loan is a loan of “last resort” or short term bridge loan that is secured by the real estate property to purchase, renew and sell at a profit. Compared to other financing options, the cost of a Hard Money Loan is usually higher for the borrower due to the high risk that the lender is taking by offering this type of financing. They are also referred to as rehab loans and have lower qualifications for approval. You can get financed up to 80% of loan-to-value through a private lender since banks do not offer this type of loan.

Bridge Loan

A bridge loan is a short term mortgage used to fund an asset until permanent financing is found; the property is rehabilitated and then resold. These types of loans are specifically built to ‘’bridge’’ a gap between two real estate transactions, they demand the borrowers to have the financial capacity to pay the 2 mortgages at once and to have a properly-outlined exit strategy.

Cash-out refinance

It’s a mortgage refinancing option used to pay off your existing mortgage. A new loan is acquired for a larger amount; this new mortgage usually has different terms than the original loan. This will result in a new payment amortization schedule, which you will be able to see in the monthly payments that need to be met in order to pay off the principal mortgage and interests by the time the loan term is completed.

Land Loans

They are a type of credit you can use to buy a vacant lot that will eventually be turned into commercial real estate. They tend to be riskier for lenders, because of that you may not get as favorable terms as you would with other types of loans.

Cannabis Real Estate Loans

Many entrepreneurs looking to operate in the cannabis industry struggle to find financing options for their buildings since marijuana is not legal at the federal level. Alternative lenders can provide that platform by giving them quick and easy access to funding for their business.

Having analyzed these options we can conclude that using a trustworthy private lender like GoKapital can make a world of difference for small businesses looking to get Commercial Real Estate Loans. Alternative lenders allow you to borrow from $500,000 to $50,000,000 and get great terms for your business that can vary from 1 – 30 years depending on the type of loan you need.

The application process is very quick; it takes 1 – 3 days for approval and up to 4 weeks to get the funds. GoKapital provides a hassle-free application process for commercial properties with nationwide coverage. You can find a wide range of real estate financing programs to meet any entrepreneur’s needs and conditions. All credit scores are accepted, if you have been operational for over 2 years this can be a perfect solution for your business.

Submit your documentation and Apply Today!

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