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Important Things To Know About Commercial Real Estate Loans
Commercial real estate loans are considerably different compared to residential loans. In fact, they are much more complicated as they come with very different terms and conditions compared to residential loans. This is one of the reasons why most investors fear venturing into the commercial real estate market.
Smaller residential real estate investors are typically limited to four to ten properties valued in the hundreds to thousands of dollars before lenders decide that’s enough risk and no more loans will be made. Loan requirements for commercial properties can vary significantly between private lenders and banks. In addition, loans held in a single lender’s portfolio may vary based on the lenders’ perceived risks.
Commercial bank loans
Banks typically want you and your partners to put down a minimum of 20-25% of the property’s value as a down payment. For example, if the property value is around RS 4 Cr, you will need to contribute around RS 80 Lakh-1 Cr as down payment. Likewise, recent research has shown us that most businesses have failed due to a lack of adequate capital to cover needs.
For this reason, banks often require the business to maintain a significant cash reserve that can be used if cash flow is not adequate to make loan payments. This financial requirement is in addition to the significant down payment. A strategy used by some business investors is to borrow as much money as they can (even at a higher interest rate) to provide sufficient capital to develop the business and thereby increase cash flow.
Private commercial loans
Private lenders or non-bank lenders usually offer less stringent requirements for business loans. There are a few lenders that require a lower down payment (10-15% range). These lenders often agree to carry the loan amount for up to 20 or 30 years until it is paid off in full (in most cases). However, they charge slightly higher interest rate compared to banks (1% or 2% more than bank rates).
But when you do all the math, the higher interest rate may not seem as expensive as it first seems. Calculate the cost of higher interest over the loan period and compare it to the cost you pay to open a new loan (2-3 times as the balloon payments sell).
The emergence of private or non-bank lenders is challenging banks on their traditional lending terms. While banks continue to tighten loan sanctioning requirements, these private lenders are moving towards a larger share as it makes it easier to qualify. So, if you are looking for a smaller business loan (less than 15 Cr) or a medium loan amount (less than 35 Cr), consider taking your time so that you can find the lenders who can offer you acceptable time and term constraints . .
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