Dealing with Commercial Real Estate (CRE) can be a daunting task, even for those with experience in the business. For a new investor, there are many variables to consider. Apart from a robust financial strategy, there is no escaping the due diligence that must be done with respect to the property you want to acquire. It is a much easier process to secure a home loan, as compared to a commercial real estate loan. But don’t be discouraged because with the right planning and knowledge of available options, you can be well on your way to sealing the deal on the business space you need.
A few points to consider before applying for a CRE Loan:
CRE Loans require a much larger financial contribution from investors, than home loans. For this reason, it is extremely important to plan for the future and not just the present. Make realistic predictions for what your business will need, even 5 to 10 years ahead, and ensure that the space you want can accommodate all these needs.
Organize your finances, as you may need to arrange for multiple sources of funding. Check your credit score, because it must be as high as possible to make it easier to receive a loan. Financial records that can be clearly explained and leave nothing to questioning will help make the loan process hindrance-free.
Educate yourself about taxes. Very often taxes can work in your favor. Stay in the loop with your accountant to know exactly what deductions may apply to you and what the tax implications of your purchase will be.
Be aware of why a CRE Loan is often a better option than availing of Bank Overdraft facilities. An overdraft facility is usually accompanied by a limit on the amount of money that can be overdrawn and much higher interest rates. The rules pertaining to an overdraft are also subject to the banks’ policies. Sometimes the bank retains the power to reduce overdraft limits and withdraw the facility at will. For example, when it notices that a company’s performance indicates financial decline. If the overdraft limit is crossed and payments are not made when due, often the facility is secured using insurance policies, shares, or other financial entities as collateral. Overall the risks can outweigh the advantages, and it is important to study the difference with respect to your business needs.
To avoid any future surprises, find out everything about the property you’re aiming to buy. It must comply with all government and environmental regulations. The banks will also have questions regarding the property, so it is best to uncover all you need to know before starting the loan process.
Work with a reputed, top-tier commercial realtor. This will be the most important decision you make. It’s important that you work with someone who knows what they’re doing and has done it successfully many times before.
Types of CRE Loans:
Bridge Loans: These are short-term, first mortgage loans that have a much higher rate of interest (ROI). The term for the loan is usually 3 years or less.
Permanent Loans: This is also a first mortgage loan. The term for a permanent loan needs to be at least 5 years coupled with a longer amortization period. Sometimes there can be floating interest rates on a loan, after its term and during its amortization period. The interest rates may vary because of several reasons and it’s important to be aware of this and consult an expert on the best method of payment. If you are financially able, at the time of the end of the loan’s term you can pay off the loan in a single balloon payment to avoid losing more money through interest in the long run.
Joint Venture Loans: This is a viable option for partners in a business who are not able to raise the capital they need individually. This type of loan applies when all parties involved are to share the profits and losses of the business equally.
Hard Money Loans: Hard money loans enlist the commercial property they cover as collateral. Because these loans do not always meet the standards of mainstream commercial lenders, they are offered by private ones. That’s why they have a higher risk of default and therefore, a higher interest rate.
Participating Mortgage Loans: In this case, apart from the monthly mortgage payments and interest, the lender receives a cut from the revenue generated by the business. This type of loan is viable only for well established, financially sturdy businesses on a long-term basis.
Whether through popular banks, private lenders, or any other means, the most important thing to keep in mind before applying for a commercial real estate loan is that there are many options available. You must take the time to collect all the information you need from reliable sources. Once that’s done, with some creative input from financial advisers, you can combine and arrange different modes of financing to help realize your commercial real estate dream.