Whether people are interested in getting started as commercial real estate investors or have dabbled in flipping houses or leasing property, they should understand how the commercial loan process works. Each lending institution has its own set of requirements, but there are certain basic conditions that remain consistent regarding commercial loans.
1. Approval Process
Depending on the circumstances, the lender will check the personal credit history of the person applying for the loan, as well as the credit history of the company. The current market, location and type of commercial property can all affect the approval process. The portfolio and value of the property will be examined, along with the potential profitability of the venture. Even if the property is being obtained at an excellent price, if the likelihood of income generation is low, the loan may be denied.
2. Loan Terms
It is a good idea for new investors to research lenders carefully to find the best loan terms. If possible, investors should locate a lending institution that specializes in helping new investors in the desired niche. Because commercial real estate loans are considered riskier than residential mortgages, new investors should have the money for a down payment and be prepared for slightly higher interest rates.
3. Repayment Process
Investors who have experience with residential mortgages may have experienced a flexible repayment plan regarding the duration and amount of the loan. However, commercial loans are much less flexible. Because they are considered a higher risk, the length of the loans is generally much shorter. Most of the time, the repayment plan is on an amortization schedule, with the bulk of the payment due at the end of the loan term. Investors who are unable to pay often obtain a new loan to cover the costs.
Although the length of commercial loans is typically shorter than residential mortgages, many lenders have a prepayment penalty policy. This can make it difficult for real estate investors to pay off loans early. In some cases, such as obtaining a loan with much better terms, paying the early repayment penalty can be worth it.
Another type of penalty is recourse, which investors can be subject to if the investment does not work out and the loan is in default. Not all commercial loans are recourse loans, but those that are can result in the lender pursuing the investor for the full amount of the loan.
Getting a commercial loan is an important part of the investment process. However, it is a good idea to read all the terms and conditions and ask questions before signing any paperwork.