5 Types of Commercial Real Estate Loans

5 Types of Commercial Real Estate Loans

Residential mortgages do not apply to financing a commercial real estate purchase. Residential mortgages do not apply. Commercial real estate loans are of a different type and need a different approach to securing flexible entrance into the complex world of business financing. Whether you purchase an apartment building, commercial office property, shopping mall, condo, or warehouse distribution center you will most likely need financing. But which one? Below is a listing and brief explanation of the most popular commercial real estate loans available. This article will discuss types of commercial real estate loans.

Most Common Commercial Real Estate Loans Available

Bridge Loan

A bridge loan is a short-term loan that can be used to pay off one debt with another. This can be very helpful when you need to sell your current property before you buy a new one. If you don’t have the capital to pay off your first mortgage, a bridge loan can help by paying off the mortgage and freeing up funds to buy your next home. The bridge loan will then be repaid when the sale of your first home closes. The interest on a bridge loan is typically higher than what you’d pay on a home equity line of credit or another traditional mortgage. However, this type of financing can be an excellent option if it allows you to purchase the property you want without having to wait until you sell your current property.

If you consider taking out a bridge loan, make sure you have enough equity in your existing home to cover any outstanding debt after the proceeds from its sale are applied. It would help if you were confident that you would be able to sell your property quickly and for the amount of money needed to repay the bridge loan. The best way to determine if a bridge loan is right for your situation is by speaking with an experienced lender who can assess all of your financial circumstances and goals, as well as any challenges.

Permanent Loan

Permanent loans are the most common type of financing in commercial real estate and are used to pay off the land loan or construction loan when a project is completed. Permanent loans tend to be long-term loans, lasting up to 20 years. These loans have fixed interest rates, which means that the rate you pay over the life of the loan remains constant. This is different from adjustable-rate commercial mortgages (ARM loans), which adjust their interest rates based on market conditions. Permanent loans are also called first mortgage loans or first-lien loans because they are the first mortgage placed on a property by a lender. A permanent loan may be amortized over its term, meaning that each payment gradually pays off more principal and less interest.

SBA Loan

To purchase, refinance, or construct commercial real estate, you’ll need to look into getting an SBA 7(a) loan. Although you can use a 504 loan to buy commercial property, the 504 can’t be used for working capital or equipment. The 7(a) loan is the most common loan program offered by the SBA. Because of this, it’s also the most flexible. Suppose you’re looking for a commercial real estate loan with favorable terms-like a low down payment and competitive interest rate-the SBA 7(a) loan is an excellent place to start your search. The other primary type of commercial real estate loan is the 504 loan. The different types of SBA loans are available for retail real estate purchases. The most significant difference between the two types of loans is how they’re serviced: The 7(a) loans are serviced by banks and credit unions, whereas the 504 loans are serviced by Certified Development Companies (CDCs). Another big difference between these two types of SBA loans is their purpose: While both can be used to buy or construct buildings, only 504 loans can be used to purchase long-term machinery.

Hard Money Loans

Hard money is a way to borrow without using traditional mortgage lenders. Search Loans are obtained from individuals or investors who lend money based (for the most part) on the property you’re using as collateral. Hard money may be the only option when the loans need to happen quickly or when traditional lenders will not approve a loan. Of course, this doesn’t come without a price. Hard money loans are commonly short-term loans of six months to three years, though some extend up to 15 years. Hard money loans typically interest only and include a balloon payment at the end of the term. According to BSC Alliant, the rate can be variable or fixed but generally ranges from 8 percent to 14 percent for borrowers with good credit. This private equity firm specializes in commercial real estate financing. Borrowers with poor credit pay up to 18 percent in interest.

Hard money is not an appropriate choice for someone buying an owner-occupied home. In most cases, hard money is used by investors who want to purchase and flip a house quickly or purchase investment properties that require little cash down, McBride says.

Blanket Loan

A blanket loan can be a single loan that covers more than one property. Banks such as Bank of America and Wells Fargo offer blanket loans used in commercial real estate to finance multiple properties with a single loan. The interest rate on blanket loans can be higher than other financing options, but they can benefit some situations. For example, a blanket loan may be used to purchase a portfolio of buildings to finance the acquisition of several properties at once.

Wrapping Up

Commercial real estate loans are among the most common types of loans you’ll find in the financial world. Commercial property can be purchased and resold regularly to make a profit, though it’s not always so simple. Commercial real estate loans can take many forms and be used for many purposes, from buying new construction to paying off outstanding debt. Each loan type is unique and may have particular guidelines surrounding it, and knowing which type you’re dealing with from Savannah GA Commercial Hard Money Loans can help you plan.