How Do Commercial Real Estate Loans Work?
Commercial real estate lending isn’t rocket science. But the lack of resources out there on the topic certainly make it feel that way, sometimes.
That’s why we’ve designed this infographic to break it down into logical steps. It starts with what you need to get approved for a CRE loan, then describes rates and fees for commercial real estate loans, and follows up with advice about finding a commercial real estate lender and last-minute tips for making an offer. Let us know what you think in the comments!
What Are Commercial Real Estate Loans?
A commercial real estate loan is a mortgage on any space that is used to generate income -- commercial, residential, or industrial.
How Do I Get Approved?
First, send in your application package.
Second, your lender will appraise the property to get its value.
Third, your application will go through the credit approval process and will then either be approved or denied.
Last, if approved, you’ll agree and finalize the terms.
What Do I Need?
Qualifying for a commercial real estate loan is a more rigorous process than applying for a residential loan.
A detailed business plan
The plans you have for the property
3-5 years of financial documents (business and personal)
Your personal credit history
Your interest rate will depend on your loan-to-value ratio (LTV), type of business, credit score, and overall financial health and stability.
In addition to a 20% - 30% down payment, you will also need to pay other upfront fees, like:
The Commercial Loan Broker
Helps the borrower understand the loan and its guidelines
Prepares a loan application that can increase your chances for success
Represents the borrower’s interests throughout the process
Finding a Commercial Real Estate Loan
Banks offer good interest rates for their lenders, but they are reserved only for people who have very good credit.
The application process is slow and requires more documentation
Faster and more lenient application process
Higher interest rates than bank loans
The Small Business Administration
The SBA 7(a) loan can be used to buy real estate, buy equipment, refinance debt, or to buy a business or franchise.
I’m Ready to Make an Offer!
Get to know the building and area.
Determine if renovations need to be made and if you could expand if you ever need to.
Find out how old the building is.
Ask about anything that could impact the property’s value (like environmental or structural issues).
Visit various properties in the area.
Think about your budget and your needs.
Set up a clear budget early on to negotiate more effectively.
Think about how much space you need.
Decide how important location is to you.
Ensure your budget can meet your needs.
Then, make your offer.
Hire a lawyer before signing any paperwork.
Know your rights and obligations, and make sure that you understand the entire contract.
Sign a Letter of Intent (LOI) outlining the terms of the transaction.