Commercial loans for real estate are a lot different in comparison to applying for residential loans. Actually, they’re more complicated as they’re carrying terms and conditions that are totally different than residential loans. This is among the reasons why many investors are afraid to venture in commercial real estate market.
Small investors of residential real estate are often limited to somewhere around 4 to 10 properties valued between hundreds to thousands of dollars before lenders conclude that it is the enough risk level and no further loans can be made. The requirements for applying commercial properties can vary significantly between banks as well as private lenders. Apart from that, the loans are held in portfolio of a single lender could vary according to the perceived risks by the lenders.
Oftentimes, banks want you as well as your partners to come up with at least 20 to 25 percent of the property value as down payment. According to recent studies as well, it showed that a number of businesses are failing mainly because of the lack of capital to meet their needs. And in relation to this, banks require businesses to maintain good amount of cash reserve that may be drawn on if the cash flow is not enough to make repayments to the loan.
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As for the financial requirement, it is actually on top of the down payment that ought to be made. One great strategy that many commercial investors are doing is borrowing as much cash as possible even at high interest in an effort to provide enough capital to build out the business and as a result, increases the cash flow.
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If you want a less stricter requirement for commercial loan, then you should consider non-bank lenders or private lenders. There are many lenders who require lower down payment that can range of 10 to 15 percent. Typically, these lenders are agreeing to carry loan amount of 20 to 30 years until it is paid completely. They’re charging higher rate of interest on the other hand which is a bit higher when compared to banks that are charging only 1 or 2 percent.
However, when you do the math, the higher interest rate may not look that expensive as it looks the first time. Calculating the cost of high interest on the period of loan and comparing it with the cost that you pay to open new loans.
Emergence of non-banking or private lenders is challenging banks on traditional terms of loans. While banks continue to implement stricter requirements to sanction the commercial loan, private lenders move towards bigger share as it makes it easier to qualify.