Commercial Mortgages 101
When you’re trying to buy a business property, you will have many financing options available to you. Depending on your personal situation and the type of property that you are looking to purchase, different loans may be better for you than others.
When it comes to commercial mortgages, there are some important details that you need to understand in order to choose the best loan for your specific needs. Commercial mortgages have several key differences from residential mortgages.
They are designed for businesses instead of individuals, can be used for a wider variety of properties and carry different risks for the lender. Here are 5 things you’ll need to know about commercial mortgages if you’re interested in using this type of financing to buy a business property.
For more information on how you can get FREE MONEY for your next childcare project, CLICK HERE.
What is a Commercial Mortgage?
In a nutshell, a commercial mortgage is a type of financing designed for businesses to purchase commercial properties.
The lender will give you the money to make the purchase, then you will make monthly payments over a set period of time until the loan is paid off in full. A commercial mortgage will be secured by the property that you are buying.
This means that if you can’t make your payments, the lender will have the right to take the property and sell it in order to recoup the money that you owe them.
Why Would You Need a Commercial Mortgage?
Commercial mortgages are different from residential mortgages in a few key ways. First, they can be used to purchase a wider variety of properties.
Residential mortgages are typically used to purchase a primary residence where you will live for many years. Commercial mortgages, on the other hand, can be used to purchase an office building that you will own for only a few years before reselling it to someone else.
Apart from being able to buy a wider range of properties, commercial mortgages also allow you to borrow more money. Residential mortgages are capped at a certain amount (about $453,100 as of 2018), while commercial mortgages can be used to borrow as much as the lender will allow.
Most commercial mortgages have interest rates that are higher than residential mortgages. This is because of the increased risk that the lender will not be repaid.
How Much Can You Borrow Using a Commercial Mortgage?
The maximum amount that you can borrow using a commercial mortgage will depend on a variety of factors, including the type of property that you are purchasing, the value of that property and your personal financial situation.
For example, if you want to buy a commercial property that is valued at $1 million, you might only be able to borrow half that amount using a commercial mortgage. This is because the lender will want to make sure that they will be able to get their money back if you can’t make your payments.
Some types of commercial mortgages may have higher limits than others. For example, SBA 7A loans are designed for borrowers who don’t have a lot of cash on hand, so they have higher borrowing limits.
The Different Types of Commercial Mortgages
There are many different commercial mortgages available to borrowers with a wide variety of credit profiles and financial situations.
Here are some of the most common types of commercial mortgages.
Commercial Mortgage: This is a standard mortgage where you borrow money from a bank or other lender and agree to pay it back over a set period of time with interest.
Commercial Bridge Loan: This type of loan is designed to bridge the gap between the moment when you have the cash to close on the property and the moment when you can get the loan that you need to make the purchase.
Commercial Hard Money Loan: If you don’t have great credit and you need a large amount of money, a commercial hard money loan may be the best option for you.
These loans are often very short-term, with repayment dates of only a few months. SBA 7A Loan: If you are buying a commercial property that you plan to operate as a business, an SBA 7A loan could be a good option for you. These loans only require a 3% down payment and are available to people with credit scores of 650 or higher.
Where to Find Good Deals on Commercial Mortgages
Lenders are in the business of making money, so you can expect them to charge you a high interest rate for the privilege of borrowing their money. However, there are some things that you can do to try to get a good deal on your commercial mortgage.
First, try to get pre-approved for a loan. This will let lenders know that you are serious about purchasing a property and that you are interested in borrowing their money. You can also use online tools like commercial mortgage calculators to try to find the best deal possible.
Make sure that you are comparing apples to apples when using these tools, though. You will need to know a few key pieces of information in order to use these calculators. For example, you will need to know how much money you want to borrow, the interest rate that you are willing to pay, and the length of time over which you will make your payments.
The Risks of a Commercial Mortgage
There are many benefits to using a commercial mortgage to make a real estate purchase. However, there are some risks associated with this type of financing that you need to be aware of.
First, if you are operating a business that is collateralizing your commercial mortgage, you need to be aware that the lender will have the right to take your business if you can’t make your payments. This means that you need to make sure that you have insurance coverage in case of a disaster or interruption that would prevent you from making the payments on your commercial mortgage.
Additionally, you will have to pay for an appraisal when you apply for a commercial mortgage. This appraisal will cost you money, but it is necessary in order to make sure that the lender is approving you for an amount that is reasonable.
Conclusion
Commercial mortgages are a very common way for businesses to get money to purchase commercial properties.
If you are looking to purchase a commercial property and you don’t have enough cash on hand to do so, a commercial mortgage could be a great option for you.
Before you make any decisions about which loan to use and with which lender, though, you need to make sure that you understand all of the risks involved with a commercial mortgage.
-This article was written by Rebecca Calbert.
Rebecca is a licensed architect with over 30 years of experience. She owns and operates an architectural firm, Calbert Design Group, and educates her clients through the commercial real estate development process with online content at SaveOnBuilding.com. Rebecca’s “purpose” is to educate small business owners and protect them from what they don’t know.
Unlocking Your Dream Property: Navigating the World of Commercial Mortgages
Imagine you’re standing at the front door of a large, empty warehouse. It’s vast, maybe a little dusty, but in your eyes, it’s brimming with possibility. Perhaps you’re dreaming of opening a brewery, a tech start-up, or even converting it into the coolest co-working space in town. But there’s one small, not-so-glamorous detail standing between you and this dream: the need for cold, hard cash to buy the property.
This is where the world of commercial mortgages comes into play—an arena that’s often misunderstood but crucial for anyone looking to buy a business property. And, just like any good investment, knowing the landscape can mean the difference between your dream becoming a reality or a financial quagmire.
Let’s dive into commercial mortgages, weaving in the stories of entrepreneurs who took the plunge, the potholes they dodged, and why understanding a few simple truths about these loans might just change how you approach your next big business move.
What Exactly is a Commercial Mortgage?
To put it simply, a commercial mortgage is like the older, more serious sibling of a residential mortgage. Instead of buying a house with a white picket fence, you’re acquiring business property: office spaces, factories, or retail spots. The bank lends you money, you pay it back over time with interest, and if you don’t… well, they take the property. Fair enough, right?
But here’s where it gets interesting. Unlike your standard home mortgage, where you’d live for years in a cozy home with a consistent 30-year repayment plan, commercial mortgages are much more diverse in both what you can buy and the risks involved.
Take Greg, for example. He had a vision of transforming an abandoned school into a chic hotel. Armed with his blueprints and a solid business plan, Greg marched into his local bank. But he quickly discovered that commercial mortgages can be a whole different ball game. The bank not only evaluated his credit but scrutinized his business plan, the value of the property, and the potential for profitability. Greg had to demonstrate that his dream hotel could generate enough cash to make the monthly payments. Turns out, lenders want to be pretty darn sure you’ll be able to repay the loan. Who would’ve guessed?
Why Would You Even Need a Commercial Mortgage?
Let’s be clear—commercial mortgages aren’t for buying a house with a white picket fence and a swingset in the backyard. No, these are for the heavy hitters. Whether you’re looking at a bustling downtown office building or a local strip mall, commercial mortgages allow you to purchase a wide variety of properties.
Take Sarah, an entrepreneur with a passion for brewing craft beer. When she stumbled upon an old warehouse, she knew it was the perfect place for her dream brewery. But instead of needing a modest loan for a single-family home, she needed a much larger sum. Residential mortgages are capped at around $453,100 (give or take a bit), but Sarah needed a cool million to get her brewery up and running. Luckily, commercial mortgages don’t have such strict limits—if your business plan is solid, you might even snag a bigger loan than you’d imagine.
But that freedom comes with higher stakes. Commercial mortgages often carry higher interest rates than their residential counterparts. Why? Because lenders see a greater risk in financing business properties. They’ve learned over time that businesses, unlike people, can go bust pretty quickly. Sarah’s craft brewery? Delicious as it may be, there’s always the chance it could go under. Banks don’t like risk, and they charge for it.
How Much Can You Borrow? It’s Complicated
The million-dollar question—literally—is how much a bank will lend you. The answer isn’t straightforward, and it depends on a cocktail of factors: the value of the property, your financial situation, the type of business you’re planning to operate, and the lender’s risk tolerance.
Imagine you’re back in Sarah’s shoes, ready to turn that dusty warehouse into the next hot brewery. The bank appraises the property at $1 million, but they might only loan you 60% or 70% of that value. Why? Because they’re hedging their bets. Lenders know that if Sarah’s dream doesn’t pan out, they need to recoup their investment by selling the property. They’d prefer to lend less than the property’s value, just in case the resale market isn’t kind.
So, Sarah ends up needing to find some extra cash—maybe an investor or a business partner to help cover the down payment. Lenders like safety nets, and they’ll expect you to have one, too.
The Different Types of Commercial Mortgages
Not all commercial mortgages are created equal. Just like there are different types of people at a party (the chatty one, the wallflower, and the one that brought too much guacamole), there are various types of commercial loans tailored to different financial situations and property types.
Take the Commercial Bridge Loan, a bit like a financial Band-Aid. Let’s say Greg found the perfect hotel space, but didn’t have time to secure long-term financing before the deal was set to close. A bridge loan could help him lock in the property and keep things moving while he finalizes a bigger loan.
Then there’s the Commercial Hard Money Loan, which sounds like something out of a crime novel, but really just means a high-interest, short-term loan. If your credit is, let’s say, “colorful,” and you’re looking to flip a property quickly, this might be your best bet. It’s risky—think of it as a fast, high-interest bet on the future.
And for those who like their loans government-backed, there’s the SBA 7A Loan. If you’re buying a property that you’ll operate as a business—like Sarah’s brewery—this could be a great option. These loans require a low down payment (around 3%) and a credit score of 650 or higher. In short, it’s the loan for dreamers with slightly imperfect credit.
The Risks: It’s Not All Sunshine and Profits
As with anything in business, there are risks to using a commercial mortgage. The biggest one? If your business can’t pay, the bank takes the property. That’s a tough pill to swallow if you’ve poured your heart and soul into building something from the ground up. And, unlike a residential property, where foreclosure is a last resort, lenders often move more swiftly when it comes to commercial real estate.
Oh, and did I mention appraisals? If you’re thinking of buying a commercial property, get ready to pay for an appraisal, which isn’t cheap. The bank wants to make sure the property is worth what you’re borrowing, and they’re not shy about passing that cost onto you.
Wrapping It Up
For business owners, commercial mortgages are the gateway to ownership—the key to turning a rundown warehouse into the next big brewery or a dusty office into a sleek tech hub. But, as with any financial tool, they come with risks, rules, and requirements.
So, next time you pass by that dream property, take a moment to consider all that goes into making it yours. It’s not just about the building; it’s about understanding the complex world of commercial mortgages, navigating the options, and knowing how to play the game. You might just surprise yourself with how much you can achieve with the right loan and a solid plan.
