Maximizing Commercial Real Estate Loan Rates For Your Upcoming Portfolio Expansion
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
Every economic downturn has its own set of silver linings. Seasoned real estate investors know that the market cannot remain "up" forever. No market is ever booming all of the time. Bull markets come in roaring, but there will come a time where the bears roam the market again, so to speak. You have to take advantage of opportunities where you can find them in any real estate cycle, and commercial real estate (CRE) loan rates make this very achievable.
What Makes Commercial Real Estate Loans Different?
Commercial real estate loans are designed to have a higher maximum than their residential counterparts. When you realize that CRE can refer to a hotel just as easily as a car wash property, it makes sense that the boundaries stretch further when it comes to a commercial loan.
However, this does mean that the loan-to-value ratio is at a different level compared to residential homes. Many residential lenders can let you borrow at 97% loan-to-value, which means that you can borrow up to 97% of the home’s value.
In commercial real estate circles, however, the lender may go up to 80% loan-to-value, but that would still mean that you have to come up with the other 20% in order for the loan to complete.
Benefits of CRE Loans
The most obvious benefit of loans for commercial buildings is that you get access to the money you need for a great deal. What could be better than that? One of the biggest things to remember is that every component of the deal has to be accounted for, including the interest on the loan itself.
Thankfully, interest is simply a component of the tool you’re using to expand your real estate portfolio. It should be calculated as a cost of doing business, as well as part of the deal’s profitability. If you can’t still make a profit even with the loan incorporated into the package, it isn’t going to be the best property for your needs.
Other benefits of these loans include being able to show the seller that you are serious about a property, not just "window shopping," as well as being able to borrow enough to cover not just the initial purchase but the repairs as well.
Sometimes local governments will offer tax incentives to offset the interest and other costs of obtaining commercial real estate loans, so make sure that you do more research within your area to see what incentives are available for your project.
Tips on Shopping for the Best Commercial Loans for Real Estate
If you’re going to spend real time shopping for commercial loans for real estate, there are a few points to keep in mind:
- Paperwork. Getting a commercial loan is not a walk in the park. Be prepared to show business tax returns, financial reports, your last three months of bank statements, and appraisals done on the property.
- Review the terms. Are the loan rates in line with what you need in order to get the property up and running? Think about the total cost of acquisition, not just the initial purchase.
- Owner occupancy requirements. Some lenders do require that the unit is at least majority-occupied by you, not just your potential tenants. This means that you would be occupying at least 51% of the building to qualify.
These points are straightforward, and the hope is that you keep them in mind not just for one loan transaction but for all of them. The better credentials you have (credit, time as an investor, etc.), the better rates you’ll receive. Since rates fluctuate all the time, it is better to shop around. We don’t include current rates because they are dramatically different depending on a variety of circumstances.
Other Considerations for Commercial Property Loans
Remember that the down payment for commercial property loans will generally be higher than what you might expect from working with residential properties only. This represents the greater risk involved with a commercial property, but that doesn’t mean that you’re stuck with a hefty bill. You can partner with other people to make the numbers make better sense, or you can negotiate directly with the lender.
One thing that also impacts the loans you receive is the properties that you already have. So make sure that when you fill out the commercial loan application that you also discuss the real estate portfolio that you already have. It can lead to much more favorable terms than if this appears like it’s your first property.
What if You Don’t Qualify?
If you go through the entire loan process and you end up not being approved by a lender, you do have options. One, you can explore other loan sources, like the SBA’s 7(a) and 504 loan programs. They aren’t the fastest loans out there, and they come with their own restrictions. Make sure that if you go this route, you read over the information carefully; the SBA has plenty of info on their website about both of these loans.
You can also turn to hard money lenders to help you fund commercial projects. You will have to ensure that your project can handle the higher cost in terms of interest; hard-money lenders are notorious for not having the best commercial real estate loan rates.
Always Do Your Research to Secure the Best CRE Loan
Commercial real estate loan rates fluctuate with the market, which means that you’ll have to shop around to make sure that you’re getting the best deal. It is very important to not just be swayed by interest rates but to look at the full loan package. This might require quite a bit of reading, but it will always pay off in the long run.
While some investors prefer to stay away from all types of outside financing, we think that real estate loans for commercial properties fill an important gap. If you’re truly interested in adding CRE properties to your portfolio, going with loans can help you accomplish that goal. Trying to save up to get into a big office building means that you’d have to either save for a long time or put your hopes on winning the lottery.
Go with the loans over the lottery tickets; they’re much more of a sure bet.
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