Understanding Commercial Investment Loans

Unlike a purchase of a residential home, purchasing and obtaining financing commercial real estate requires a skill investor and an experienced attorney as Mr. Trivedi, Esq.

There are a wide range of commercial investment loan types, and it is up to the investor to decide which financing option best fits their needs. Each type of loan has unique eligibility requirements, such as a minimum credit score, experience level and down payment requirement. These loans also have varying terms including the loan term, interest rate, and loan-to-value (LTV) ratio. For example, one investor may be in search of a loan that offers lower interest rates over a longer loan term, while another investor’s priority might be finding a short-term loan as a means of bridging a financial gap.

How To Get A Commercial Real Estate Loan

The idea of obtaining commercial real estate financing may seem intimidating at first, but investors who spend the time learning about the process and the different types of commercial real estate loans will find that they are completely attainable. Below are the main steps involved in obtaining a commercial investment property loan:

  • Individual Vs Entity: Step one is to determine whether to finance a commercial property as an individual, or as an entity. Although the majority of commercial real estate is purchased by business entities such as corporations, developers and business partnerships, it can easily be completed as an individual investor. The lender essentially wants to make certain the borrower can repay the loan, thus requiring borrowers to provide financial track records in order to secure a loan. For newer businesses with no credit history, the lender will typically require the investor(s) to guarantee the loan.
  • Mortgage Options: It is important for investors to recognize that residential and commercial mortgages are not the same. First, unlike residential mortgages, commercial loans are not backed by government agencies such as Freddie Mac and Fannie Mae. Secondly, commercial loans terms differ from those of residential properties. Commercial loans range from 5 to 20 years, whereas residential loans will typically range from 15, to 30 years. Lenders will typically make their decisions based on an investor’s financial and credit history.  Although Commercial loans can range from 5 to 20 years term, but their payment can be based upon 10 to 25 years.
  • Loan To Value Ratio: An important metric lenders consider when financing commercial real estate is a property’s loan-to-value ratio (LTV). This figure measures the value of a loan against the value of the property, and is calculated by dividing the amount of the loan by the property’s appraisal value or purchase price. For commercial loans, the LTV will range from 65 to 80 percent, with lower LTVs qualifying for more favorable financing rates.  Also, the investor is purchasing property as an owner operated investment, then LTV will range close to 80 percent.  In such case, lender will seek business financial of the operating company and a business plan of the investor seeking to operate the business and own the commercial.
  • Debt Service Coverage Ratio: Lenders also look at debt-service coverage ratio (DSCR). This metric measures a property’s ability to service a debt. It compares a property’s annual net operating income to its annual mortgage debt service, including principal and interest. A DSCR of less than one percent reveals a negative cash flow. Commercial lenders generally look for DSCRs of at least 1.25 to ensure proper cash flow.

We hope that we have provided some initial relevant information for you to get started in pursuing investment in commercial.  If you have any questions or concerns, please do not hesitate to schedule an appointment and discuss the matter with Mr. Trivedi.