Compared to applying for residential loans, commercial loans for real estate are a lot different. Actually, they’re more complicated as they’re carrying terms and conditions that are totally different than residential loans. As a matter of fact, this is one of the many reasons why a lot of 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. For this reason, banks are requiring businesses to maintain a good amount of cash reserve that could be drawn on if the cash flow isn’t adequate in making the loan payments.
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This financial requirement is on top of the hefty down payment that has 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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When it comes to non-bank lenders or private lenders, they are typically offering less rigorous requirements for commercial loans. There are many lenders who require 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. The thing is, they charge higher rate of interests that are a bit higher than 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 the high interest on period of the loan and then comparing it with the cost that you should pay to open new loans.
The traditional terms of loans by banks is challenged by the emergence of non-banking or private lenders. 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.