Posted on: 27 June 2018
When the time arrives to search for your very first commercial real estate property, part of getting the best deal will include whether or not you have taken the time to arrange good financing. While paying cash is always optimal, novice investors rarely have enough funds at their disposal to do so. When using cash is not possible, arranging a commercial real estate mortgage with favorable terms is the next best plan. If you about to begin your new career as a commercial real estate investor, the following tips will be helpful in finding the best possible financing for your purchase.
Be careful of terms and costs
One of the first things to know about obtaining your first commercial real estate loan is that the application process, terms, and costs are notably different from those associated with the average home mortgage application process.
The down payment requirement for the commercial mortgage is an excellent example of this difference. For example, a home mortgage, such as an FHA loan, can often be obtained with just 3.5 percent down. In contrast, the average commercial loan down payment is usually between one-quarter and one-third of the purchase price. In situations where the deal carries more risk, the down payment may be half of the purchase price or even more.
Repayment terms are different than a home loan, as well and prospective borrowers must carefully examine them when making application. A good example of this is the fact that finding a fixed rate loan at a low interest rate may not be possible. Instead, many commercial real estate loans include shorter repayment terms, with adjustable rates and higher interest rates.
Be watchful for prepayment penalties
Borrowers who neglect to look for prepayment penalties when applying for a commercial loan can find themselves dealing with an uncomfortable financial situation later in their ownership. Accepting a commercial loan that includes prepayment penalties can mean that selling the property or paying it off early can incur extra costs that can total thousands of dollars. Prospective borrowers who cannot locate suitable financing with some type of prepayment penalty should look for those in which the penalty reduces automatically each year as the loan is repaid.
Be aware of reserve requirements
Reserve requirements are another way in which commercial real estate loans differ greatly from residential home mortgages. Common reserve requirements include the buyer proving they have at least six months of payments held in reserve in an account where it can be easily accessed.
When reserve requirements are part of the commercial loan package, the lender often stipulates the form in which the money can be held. Most will require it be where it can be shielded from other use, such as in a separate account, and that it be in a liquid form that is readily accessible, instead of tying it up for an extended time frame in certificate of deposits or other investment vehicles.
Be careful when choosing the right lender and loan option
Additional questions that should always be asked during any application for a commercial loan include the amount of time required for the closing to occur and whether there is a minimum loan amount specified. Since commercial real estate deals can often go awry when the loan fails to close on time or another problem arises, taking care to learn as much as possible before applying is the best plan.
In order to enjoy the best possible experience when applying for a first commercial real estate loan, it is crucial to work only with a trusted, caring commercial lender like LCNB National Bank. These professionals have a deep understanding of the local commercial estate market and the loans that will best fit each situation.Share