If you are looking to start your journey as a real estate investor, financing has to be the most critical part of what you do.
If you ask me, it’s very much possible to acquire a profitable real estate asset without having the right amount of resources.
But the question you have to consider is: how and where?
Here’s a very brief overview of commercial mortgages and how you can get funding for a commercial real estate asset:
Commercial Mortgages Explained
If you can’t afford to finance a new home, you can always apply for a mortgage. The same is true when you scout for commercial properties to acquire. You can get a commercial mortgage to secure funding for a property.
But while they have the same concept as traditional real estate loans, commercial mortgages are actually a different type of product altogether.
Unlike residential mortgages, commercial mortgages are availed by a business entity rather than an individual. Think of LLCs and trusts that are formed for the purpose of buying commercial real estate assets.
That being said, commercial mortgages are mostly used for expanding business facilities, developing existing owner-occupied businesses, acquiring new property, and initiating land development projects.
Here are just some examples of the projects you need a commercial mortgage for:
- Rental apartments
- Office spaces
- Resorts and hospitality assets
- Medical facilities
- Retail spaces
- Land development projects
- Storage facilities
In addition, there are other factors that differentiate commercial real estate loans from other loan products:
1. Higher Interest Rates
Under uncertain economic conditions, businesses find it hard to catch up with overhead costs. That is why most lenders classify commercial mortgages as high-risk since no one can really predict how the market will perform in the near future.
2. Shorter Loan Terms
Considering the fact that business entities are high-risk, repayment terms are usually shorter compared to residential mortgages. If you are going to apply for one, expect to be offered loan terms that range from 10 years to 20 years.
3. Debt Coverage Ratio
In calculating a business’s capacity to write off debt, lenders use an instrument known as a debt coverage ratio or DCR. This instrument compares how much the business earns against its monthly repayments. So, in order to qualify for a commercial mortgage, you need to make sure you have a healthy bottom line and a consistent capacity to pay your monthly dues.
In looking for a lender for a commercial mortgage, it helps to look for a company that offers the best possible terms based on the size and income of your business entity.
But aside from that, you also need to figure out the type of commercial mortgage you want to avail:
FINDING THE RIGHT TYPE OF COMMERCIAL MORTGAGE
There are various commercial loan types to consider based on your business’s requirements. Here are a few of them:
1. Long-term Fixed-interest
When it comes to commercial mortgages, the most basic type is the long-term fixed-interest loan with repayment terms not exceeding 20 years. Interest payments remain the same all throughout, but lenders require good FICO scores and at least a year in operation.
2. Refinance Loan
Looking to revitalize your property? The best time to do so is a low-interest environment. You can take advantage of this through refinancing loans that entail lower monthly payments.
3. Construction Loan
If you plan to develop a piece of land, you can take out a construction loan to finance the construction of commercial buildings. This should come in handy if you want to quickly add value to a piece of land you already purchased.
4. Interest-only Payment Loan
Your business might not enjoy a steady income stream for the long term, but that shouldn’t keep you from financing commercial projects. Using an interest-only payment plan, you get to pay smaller amounts on interest until your income stream balloons in the future.
5. Bridge Loans
As the term implies, bridge loans allow you to bridge the purchase of your property and arrange for its long-term financing. In other words, you apply for bridge loans if you don’t have the money to secure a commercial mortgage yet as you wait for your cash flow to stabilize.
No doubt, there is a mortgage that aligns with your overall business goals. You just have to learn as much as you can about these types of loan products before you proceed to qualify for one.
By Ola Ibiwoye BPHARM, RPH
