Commercial Real Estate Loans are financing products designed to be used for purchasing new or existing commercial real estate properties to attract better tenants. There are numerous types of commercial real estate loans floating around in the market, and finding the best loan that suits your specific needs is crucial.
Although rates alone cannot decide what kind of loan might work out best for each project. However, while making decisions knowing the average market rates of various kinds of loans comes handy. We’ve done the job for you, and this blog is an overview of commercial loan rates for 2020.
Read on to understand different types of commercial real estate loans that are there and their pertaining rates and amounts. We’ve also discussed the summary of commercial mortgage rates and how they work for the most common types of commercial real estate loans.
The average commercial real estate mortgage rates range from 4% to 20% depending on various factors like the type of property being financed, your credit scores, and the kind of lender you are working with.
In a typical scenario, banks and SBA Lenders provide the least loan rates while the commercial real estate hard money lenders charge the most. However, depending on your varied and diverse needs, you should decide which loan option is the best one for you. Remember that there is no one-size-fits-all when it comes to commercial real estate loans. It is important to consider each type of loan in light of your unique needs and then make decisions.
Here are the average commercial real estate loan rates for 2020
|Type of commercial real estate loan
|Loan amount and terms
|SBA 504 Loan
|$50,000 to $20 million+,20 to 25 years
|Approx. 4% to 6%
|SBA 7(a) Loan
|$5,000 to $5 million, 25 years
|Approx. 7% to 9.5%
|$25,000+, 10 – 15 years
|Beginning from 3.75%
|Hard Money Loans
|1 to 5 years
|Approx. 10% to 20%
|Traditional commercial mortgage
|Usually no limit, 5 to 10 years
|Approx 5% to 7%
|Commercial Bridge Loan
|$1 million+, 6 to 12 months
|Approx. 3% to 20%
Since the Housing Crash of 2008, the commercial real estate loan rates have shot up in the market and has seen an increasing trend. The prices today stand at least 50% higher than the pre-recession rates. Thus, it is now more important for commercial real estate investors than ever to consider the various kinds of loans available out there and understand their eligibility for different loans.
While SBA loans are generally provided for the most qualified borrowers, the hard money loans are available for borrowers who can bear larger down payments and interest rates. The good news is that there is some type of loan available for any borrower and any financing need.
You just have to shop around and do your research before deciding the loan you want to go ahead with. Given below is the summary of the most common types of commercial real estate loans, along with their rates and basic eligibility requirements.
#1 – SBA 504 Commercial Real Estate Loans
SBA 504 Commercial Real Estate Loans offers the most affordable type of loan with commercial property interest rates starting from as below as 3.5%. These loans are backed by the U.S Small Business Administration (SBA loans), which work through local intermediaries called certified development companies (CDCs). These loans allow borrowers to purchase or renovate and upgrade a commercial real estate property.
The loan amounts for SBA 504 loans would range from $50,000 to $20 million and more, depending upon the property type and borrowers’ creditworthiness. In most cases, borrowers are required to bring up to 10% down payment for loan approval. The best part about SBA 504 loans are longer terms and lower fixed interest rates.
The loan terms can go as long as 25 years, thus reducing the monthly loan payouts. Besides, the fixed interest rates let the borrower lock in on a single blanket rate throughout the loan period, without having to worry about the fluctuating market conditions. As a borrower of the SBA 504 loan, it is very important to have a good credit score and a profitable business that has been so for at least two years.
#2 – SBA 7(a) Commercial Real Estate Loans
The next most common type of commercial real estate loans is SBA 7(a), which offers commercial real estate loan interest rates of 7% to 9.5%. The loan amount goes up to $5 million, and it can be applied towards any kind of business purpose, including purchase and renovation of commercial real estate property.
The SBA 7(a) loans generally require a higher down payment in comparison to the SBA 504 loans, going as high as 20% of the loan amount. The commercial property loan interest rates can either be fixed or variable, depending on the type of borrowers and their credit scores.
If you have a varying loan rate mortgage, there is a high chance of an increase in the rates. Besides this, another major downside of availing an SBA 7 (a) loan is the longer processing windows.
It may take several weeks or even months for the SBA to get back on your loan approval request. Thus, these loans might not be the best option for business owners who want to quickly close their loans and move fast. However, if you are planning to buy a house property that you wish to live in, and can wait a couple of weeks or months, hoping for the best loan – this option works great!
#3 – Traditional Bank Commercial Real Estate Loans
Traditional bank loans are another type of commercial real estate loans that are best suited for Commercial investors. Although SBA loans are great and come with the best loan rates, it might take long for banks to approve such funding. Besides, there are many rules and regulations that banks need to follow to finance an SBA loan. Thus, the next best option is traditional bank loans, which have an average loan rate of around 4%.
Although the rates are similar to that of SBA loan rates, these loans have shorter processing windows and are best suited for borrowers who want huge capital. Bank loans aren’t the best option for small amounts, like $250,000.
Additionally, borrowers are required to put down a larger down payment as SBA doesn’t back bank loans, and thus banks have less guarantee. The repayment terms for these loans are typically shorter than SBA loans. A good credit score coupled with solid business credentials is the two main criteria for borrowers to avail of bank loans.
#4 – Hard Money Commercial Real Estate Loans
Hard money loans are Commercial Real Estate Loans that are provided by non-bank private lenders. These lenders may be individuals, small agencies, or online lenders. Small business owners who want real estate financing to support a purchase or renovation expense of their properties but fail to qualify for SBA or bank loans generally turn to hard money loans. These loans carry the highest loan rates, ranging from 10% to 20%, but that is only the biggest downside.
Hard money Commercial Real Estate Loans have the lowest qualification requirements and are also processed in much shorter time windows. Typically, they are processed within one or two weeks, as opposed to banks and SBA loans that might sometimes take several weeks or even months.
The trade-off you will need to make to avail of this is the larger loan rates (10% to 20%) and shorter-term loans, ranging from 1 to 5 years. There are various types of Hard Money Commercial Real Estate Loans, like Commercial Bridge loans and Commercial Refinance loans. You should consider the various loan types in light of your unique financing needs.
The Final Words
Choosing the right kind of financing might be made or break the success of your commercial real estate investing. It is one of the most important decisions you will make, and getting the best loan can help you save thousands of dollars throughout your loan. Thus, take your time to shop around for the best loans in the market before you zero it down to one.