Compared to applying for residential loans, commercial loans for real estate are a lot different. The truth is, they are a lot more complicated because they carry terms and conditions that are totally different than residential loans. This is one of the reasons why there are many investors who are afraid to venture in commercial real estate market.
Before lenders come to a conclusion that there’s enough risk level and no further loans could be made, small investors of residential real estate are typically limited to 4 to 10 properties valued between hundreds to thousands of dollars. The requirements needed to apply for a commercial property will significantly vary between banks and private lenders as well. Not only that, loans are also held in portfolio of single lender may vary on the risks perceived by lenders.
Banks oftentimes want you and your partners as well to come up with around 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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This financial requirement is on top of the hefty down payment that has to be made. A good strategy that several commercial investors do is borrowing as much cash as they could get even at higher interests in order to provide enough capital in building out the business and therefore, increases the cash flow.
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When it comes to non-bank lenders or private lenders, they are typically offering less rigorous requirements for commercial loans. As a matter of fact, there are a lot of lenders that only need lower down payment that can range of 10 to 15 percent. Believe it or not, most of these lenders actually agree 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.
If you are going to do the math however, the higher interest rate may not look that costly as what it seems for the first time. Calculating the cost of high interest on period of loan and then comparing it with the cost you pay to open new loans.
Emergence of non-banking or private lenders is challenging banks on traditional terms of loans. While banks keep on implementing stricter requirements to sanction the commercial loan, private lenders are moving towards bigger share because it makes it easier to quality.