Retail Investment Properties Loans

Retail Investment Properties Loans

Commercial real estate (CRE) is a lucrative investment you will ever make as an investor. These are the revenue generating properties that can offer myriads of benefits over any of the residential investments. You can use these as a dominant source for building wealth but you can also generate monthly cash flow. 

However, it is worth noting that your commercial wealth will not start to generate wealth from the first rent check you receive.  Instead, it begins to grow when your use commercial investment property loans to fund desired deals. 

Furthermore, the structure commercial property financing that you have used to fund an acquisition will also decide the tone of your exit strategy.

Types of Commercial Real Estate

In order to understand how to invest in commercial real estate, you must first familiarize yourself with various types of commercial real estate. You can generally use this type of properties for business purposes. However, it is the owners who will be leasing the occupied space in return receiving a monthly rent. Commercial properties in question typically consist of the following types of real estate:

  • Office

  • Retail

  • Industrial

  • Multifamily

  • Special-Purpose

 

Retail

Retail buildings are another popular type in the commercial real estate domain. The properties range from strip malls to banks and community retail centers to restaurants, all located in urban areas. The size of retail buildings can range anywhere from 5,000 square feet to 350,000 square feet. 

Purpose

Unlike other properties mentioned above, the investors build special-purpose commercial real estate properties. Such buildings typically consist of car washes, self-storage facilities, and even churches.

Best commercial real estate properties are in high demand. Therefore, investors must focus on location, future development, and improvements. This is not only how commercial properties gain visibility but also appreciate in value. 

 

Commercial Real Estate Interest Rates & Fees

In contrast to residential loans, the interest rates on commercial real estate loans are generally higher. Several fees attribute to the overall cost of commercial real estate loans, including: 

  • Appraisal fee

  • Legal  fee

  • Application fee

  • Origination fee

  • Survey fee

Some of these fees are applicable annually, whereas you must pay the others upfront even before the loan approval. 

For example, a commercial loan for a rental property may have a one-time loan origination fee of 1% and a 0.25% annual fee up until you pay the loan in full. This means if you have a loan of $1 million, it might require a loan origination fee of $10,000 paid up front. Your annual fee will be $2,500 with additional interest. You must always make sure to go through the interest rates frequently as they are prone to vary due to fluctuation.

 

Commercial Real Estate Loan Prepayment

This loan may come with prepayment restrictions. However, the restrictions are there for a purpose. This includes preservation of your lender’s anticipated yield. This way as an investors, you can settle your debt even before your commercial property investment loan matures. However, you will have to pay the penalties for going down this route. 

If you pay off a loan early, there are four primary types of exit penalties:

Prepayment Penalty

This is the most common and basic prepayment penalty. You can calculate it by multiplying the specified prepayment penalty by the current outstanding balance.

Interest Guarantee

Even if you pay off the loan early, the lender is still entitled to a specified amount of interest. For example, a loan can have an interest rate of 10% guaranteed for 60 months and a 5% exit fee after that.

Lockout

As a borrower, you are unable to pay off a loan before a specified period of time.

Defeasance

This is considered a substitution for collateral. As a borrower, you can exchange new collateral, such as U.S. Treasury securities, for the original loan collateral instead of paying cash to the lender. While this can reduce fees, high penalties can be attached to this type of loan payment.

 

How to Get Commercial Investment Property Loans

The idea  behind obtaining a commercial real estate mortgage may sound quite intimidating at first. However, if you are an investor,  learning about the process and the different commercial real estate loans can be really helpful. You will find out that commercial investment property loans are completely attainable. 

If you wish to apply for a commercial investment property loan, simply follow the below-mentioned steps. 

  1. Determine whether you will file as an individual or an entity.

  2. Evaluate mortgage options to determine which commercial real estate loans will work best for the property and exit strategy.

  3. Calculate your LTV to measure the value of the loan to the property's value.

  4. Measure the ability to service the debt using the debt service coverage ratio.

 

Individual vs. Entity

The initial step for you is to determine whether you should finance a commercial property as an entity or individually. Typically, corporate entities such as, developers, corporations, and business partnerships buy commercial real estate. However, you can conveniently acquire such properties as an individual investor. 

The lenders essentially want to ensure that you, as a borrower will be able to repay the loan. Therefore, you must make sure to provide your financial track records to secure a mortgage. The lender will typically require an investor to take guarantee if the loaned amount is for new businesses with no credit history.

Mortgage Options

If you are an investor, you need to recognize residential and commercial mortgages are not the same. Unlike residential mortgages, commercial loans do not come with the backing of government agencies such as Freddie Mac and Fannie Mae. Furthermore, commercial mortgages will typically charge higher interest rates than comparable home loans.

Another aspect to remember is that the terms of commercial loans differ from residential ones. Commercial loans' duration range from 5 to 20 years, whereas you can get a residential loan for 15, 25, and 30 years. As an investor, you have to remember that major chunk of this decision will be based on  lender’s review of credit and financial history.

Loan-To-Value Ratio

This is a vital metric that a lender will consider when granting you a commercial real estate. Your loan-to-value ratios (LTV) measures the value of a loan against the value of the property. You can calculate your LTV by dividing the loan amount by the property's appraisal value or purchase price. 

Loans for commercial real estate come with an LTV between 65% and 80%. The lower your LTV, the more favorable financing rates you will receive. 

 

Debt Service Coverage Ratio

Lenders also look at the debt-service coverage ratio (DSCR), i.e., a measure of cash flow available to pay off the current debt obligation. In essence, it compares your annual net operating income to its annual mortgage debt service, including principal and interest. 

A DSCR that is less than 1% reveals a negative cash flow. Commercial loan providers will typically look at your DSCRs and it should be a minimum of 1.25 as this will ensure healthy cash flow.

If you are an investor thinking about financing a commercial property, first, you need to consider all aspects of the process, including:

  • Loan-to-value ratio

  • Debt-service coverage

  • Creditworthiness

Additionally, a proper business plan will help you, especially beginner investors, streamline the financing process.

The idea  behind obtaining a commercial real estate mortgage may sound quite intimidating at first. However, if you are an investor,  learning about the process and the different commercial real estate loans can be really helpful. You will find out that commercial investment property loans are completely attainable. 

If you wish to apply for a commercial investment property loan, simply follow the below-mentioned steps. 

  1. Determine whether you will file as an individual or an entity.

  2. Evaluate mortgage options to determine which commercial real estate loans will work best for the property and exit strategy.

  3. Calculate your LTV to measure the value of the loan to the property's value.

  4. Measure the ability to service the debt using the debt service coverage ratio.

Types of Commercial Real Estate Loans

There is a wide range of commercial investment loan types. However, it is up to you to decide which financing option best fits your needs. Each type of loan has unique eligibility requirements, such as:

  • Minimum credit score

  • Experience level

  • Down payment requirement

Commercial real estate loans also come with various loan terms, interest rates, and loan-to-value (LTV) ratios.

For a better understanding of which commercial real estate loans may meet your own needs, please reference the following:

  • Small Business Administration (SBA) 7(a) Loan

  • Certified Development Company (CDC) / SBA 504 Loan

  • Conventional Loan

  • Commercial Bridge Loan

  • Hard Money Loan

  • Conduit Loan

 

Small Business Administration (SBA) 7(a) Loans

The U.S. Small Business Administration offers several loans under the 7(a) umbrella specifically designed to provide financial assistance for small businesses. Investors looking for commercial real estate loans should carefully consider which of the following 7(a) Loans will work best for their next project:

  • Standard 7(a) – this loan comes with a maximum loan amount of $5 million and a turnaround time of 5-10 business days.

  • 7(a) Small Loan - a smaller variation of the standard 7(a) loan, with a maximum loan limit of $350,000.

  • SBA Express – a loan that awards applicants with a 36-hour response window for a loan with a maximum limit of $350,000.

  • Export Express – this one has an application response time of 24 hours. An Export Express loan is ideal if you need a streamlined method of obtaining lines of credit up to $500,000.

  • Export Working Capital – Are you a business in need of working capital to increase your export sales? Then you may appreciate this particular SBA loan.

  • International Trade – you can use this type of commercial loan for fixed assets for construction, building, and real estate equipment. If you are a business expanding due to growing export sales, this international trade loan is ideal. 

  • Preferred Lenders – this SBA program gives select lenders more authority to process, close, service, and liquidate SBA-guaranteed loans.

  • Veterans Advantage- as the name suggests, this SBA loan intends to assist veteran-owned businesses with reduced fees.

  • CAPLines is an umbrella program capable of offering short-term working capital to help small businesses immediately.

Certified Development Company (CDC) / SBA 504 Loan

Your 504 Loan Program is another financing option by SBA. This loan is made available through Certified Development Companies (CDC). This loan can stimulate economic growth and job creation by offering small businesses yet another financing avenue. 

According to the SBA, the “504 Loan Program offers long-term and fixed-rate financing to approved small businesses. You can use the loan to acquire fixed assets for expansion or modernization. 

However, the 504 Loans cannot exceed $5 million and are specifically designated for fixed assets, including:

  • The acquisition of existing real estate assets

  • The acquisition of raw land and subsequent improvements

  • The construction of new facilities or modernizing, renovating, or converting existing facilities

  • The purchase of machinery for long-term use

  • The refinancing of debt to facilitate the expansion of a business with new or renovated facilities

 

Conventional Loan

A Conventional commercial real estate loan is also known as a traditional loan issued by banks or other lending institutions. Consequently, these loans do not come with federal government backing. 

You can use a conventional loan to purchase and finance assets like owner-occupied office buildings, retail centers, shopping centers, and industrial warehouses. Conventional loans have managed to gain a reputation as one of the most widely utilized commercial real estate financing options/

A conventional commercial property loan typically finances anywhere between 65% and 85% of your asset’s actual LTV ratio. As a result, you will have to cover anywhere from 15% to 35% of the property's fair market value.

There is usually no maximum loan term. However, you can expect commercial real estate loan terms to last anywhere from 5 to 20 years, with payments fully amortized over the loan’s duration. While your conventional loans may come with lower fees, you will often find it hard to get an approval for this type of financing.

Commercial Bridge Loan

This loan represents a temporary loan option for investors. You can secure this short-term loan to bridge the gap until refinancing becomes available to make the switch to a longer-term loan. 

Typically offered by institutionalized lenders, a commercial bridge loan allows you to compete with all-cash buyers. Commercial bridge loans usually finance up to 90% of a property's LTV. Therefore, if you are short on cash, you can use this financing option to enter the commercial real estate sector. 

Bridge loans are short-term, with a maximum duration of up to 3 years. Therefore, you should expect to refinance to a long-term loan in the near future.

 

Hard Money Loan

A hard money loan is available to commercial investors by organized semi-institutionalized lenders. More importantly, hard money lenders have a license to lend to real estate investors. Additionally, such lenders specialize in short-term, high-rate loans with fees that award you a chance to buy commercial real estate that was out of your financial range. 

In return for roughly 60% to 75% of the assets’ after repair value (ARV), hard money lenders will require interest fees upwards of 15%. That is in addition to about four points (another upfront percentage fee based on the loan amount). 

Hard money lender fees can sometimes be as much as four times that of traditional lender fees. However, it may be well worth the cost of admission for short-term loans. You will get access to the funding granted within a matter of day. This is completely opposite to the time it takes with conventional lenders). However, the latter are far more easier to get approved.

Hard money mortgages are asset-based. This means that your lenders make decisions based on your property and not entirely on your personal financial history.

Conduit Loan

Conduit financing are commonly known as commercial mortgage-backed securities (CMBS). This deals with all types of commercial real estate mortgages secured by a first-position mortgage on any commercial property. 

You can apply for a conduit loan through commercial banks. The loan offers you a fixed interest rate for 25 — 30 years. However, it is important to note that you will have to make a balloon payment at the end of your loan term. 

However, thanks to the loan’s relative flexibility as it allows you as a commercial real estate investor to qualify for a mortgage.

How to Qualify for a Commercial Real Estate Mortgage?

As with all loan types, there are qualifications criteria you must meet before securing one. If you wish to secure a small business administration mortgage, then most likely need a higher business credit score . this can range from 0 to 100. Furthermore, your business must meet the SBA’s size standards. 

If you wish to successfully qualify for an SBA 504 loan, your business’ income must be less than 15 million. Traditional loans from a bank or other lenders will typically require your credit score to be 700 or higher. 

Commercial bridge loan will also require you to have a credit score of 680 or higher. On the other hand, a hard money loan is comparatively easier to secure. However, it may have higher interest rates than traditional lenders. Do your research on lender’s specific requirements to ensure that the loan you apply for is right for you.

How Long Can It Take To Secure A Commercial Real Estate Mortgage?

According to Anton Konopilov, founder and CEO of Palma Violets Loans, it typically requires 3 to 6 weeks for a bank to approve your commercial real estate mortgage. However, some claim that they can close it as soon as within a week. 

A bank will spend this time evaluating multiple aspects of your business before deciding whether to approve your loan request or not. Konopilov further added that most lenders offering this type of loan will expect you to make at least a 30 percent down payment before they consider approve your mortgage application. Therefore, it is fair to say or assume that loan processing time may vary.

You can obtain a bridge or hard money loan in a week or less, as long as you are willing to pay higher interest fees. Regardless of the loan you choose, be sure to research all aspects of your business and the loan terms before committing.

 

What Is an Owner-Occupied Commercial Property/Real Estate?

Majority of commercial real estate purchases have a sole intent of generating ongoing income. These properties are primarily for tenants who rent individual units through a lease agreement. However, in various cases you as an investor will purchase commercial properties to use the building for personal purposes. These types of properties are often referred to as Owner-Occupied Commercial Real Estate (OOCRE).

Generally, an owner-occupied commercial property must fulfill two conditions. First, the owner’s occupancy percentage of the property and second is the amount of rent paid by the owner. Also, OOCRE loans are completely different from non-owner-occupied loans. Therefore, they have different lenders’ qualification criteria. 

First, lenders may look at the primary source you will us repay your OOCRE loan. The driving force behind this decision will predominantly be your debt-service coverage. The lender will use it to determine your business earnings before taxation and interests.

 Summary

To truly understand how to invest in commercial real estate, you need to fully understand the financial components that go along with it. Commercial investment property loans have been instrumental in the success or failure of a particular exit strategy. Therefore, you must due diligent and review your commercial property financing process prior to save yourself from making any rash decisions. 

Both parties i.e. the real estate investors as well as the business owners may be able to secure a mixed-use property mortgage. Business owners often live in one of the residential units and operate out of the commercial space. On the other hand, real estate investors typically act as the landlord for both the residential and commercial tenants.

It is the residential tenants that prove to be a more stable source of rental income. On the other hand, a commercial tenant including ground floor retail can be willing to pay a higher rent. Therefore, it is the commercial tenants that play a critical role when it comes to evaluation of your revenue potential from the mixed-use properties. Result? The value of two completely different commercial buildings in the same location or area may be different simply because its composition of the tenants.