Fundamentals of commercial real estate loans for investors

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Real estate is one resource that only increases in value over time and investing in real estate properties can be a great way to generate a passive income.

Commercial properties, in particular, are more lucrative than residential properties because they offer enhanced benefits such as providing a higher potential for income and increased appreciation value.

However, one major downside is that it requires a larger initial investment compared to residential properties. The good news is you will find many companies offering commercial real estate loans that will help finance your venture.

To further understand how commercial real estate loans work, highlighted below are the fundamentals of these loans for investors.

What Is a Commercial Real Estate Loan

A commercial real estate loan is a type of loan that allows investors to purchase investment properties, specifically commercial ones. An example of a commercial property is a building that is used as an office space or for retail.

There are various types of commercial real estate loans that help investors everywhere purchase commercial properties with easier and more convenient payment terms.

Difference From Other Loans

Commercial real estate loans often have shorter payment terms compared to standard mortgages, with terms usually ranging between 5 to 20 years compared to the standard 15 to 30 years.

Moreover, the downpayment required is slightly higher than that of standard loans, usually somewhere around 25 to 30% of the total amount. SBA loans are the exceptions to this by requiring only around 10 to 15% for those qualified.

How Do Commercial Real Estate Loans Work

Unlike with residential loans, commercial real estate loans are loans that specifically finance income-generating properties.

An investor who wants to borrow money for commercial property often needs to establish a business entity to qualify for this type of loan.

Lenders also often require the borrower to put the property as collateral so they can seize the property in the event they default on their payments.

Moreover, aside from having a good credit score, another important requirement when lenders decide whether or not to approve the loan is the property’s potential to generate income.

Commercial real estate loans are associated with higher risks but borrowers often have the incentive of the property’s potential income.

Most Common Financing Options for Commercial Real Estate

Here are some of the most common types of commercial real estate loans.

Small Business Administration / SBA 7(A) Loans

This loan option is backed by the US Small Business Administration and is perfect for smaller projects. This financing option is the easiest to apply for among all of the SBA loans…
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