The CRE industry is quite wide. Making an investment herein will require a great amount of funding which is why having it all prepared before you actually begin the search is vital to ensure you can make the most of the available chance.
When purchasing real property, the investors can choose from two loan categories which can be residential and commercial. Both of them provide great business opportunities. But if you are comparing the investment options, then you will have to consider the difference between the two in terms of benefits, finance, and drawbacks.
No doubt making a decision herein will be quite overwhelming. If you are unsure as to what to choose, then the guide here will provide you with the essential information that will help you decide the best.
Difference between property bought with a mortgage vs. a commercial loan.
In simple terms, the major difference between the consumer home loans and the commercial real estate loans can be in terms of the intended use and the size. For instance, consumer loans are used for single-family houses.
On the other side, commercial real estate loans are used for making purchases of buildings that do not fall into the category of rental properties and have five or more units. They can be an office building, warehouse, house rental spaces, etc.
As per the standards, it is possible for an investor to buy up to 10 investment properties by making use of a conventional mortgage loan. Thus you need to know that the mortgage standards will only be applicable right up to 5 properties because of the complex
underwriting. When you exceed about five properties, then you will have to start looking for a commercial real estate loan.
Commercial real estate loan vs. conventional home loan
We don’t have enough money to cover the cost of the investment purchase; then, you will need to go to the bank for a loan. But you must know that conventional and commercial lending are two different things. Thus it is vital to understand the difference between the two.
Getting a conventional loan
If you are a homeowner, then you will probably be familiar with mortgage loans. The loan is a lot more similar to the primary residence mortgage, but before you go ahead with the investment, you need to understand certain things.
- During the application process, the lender will closely look at the personal finances. They will want to see the credit history, income, and personal debts.
- The bank will want you to put about 25% of the down payment. When compared, it will be a 3.5% down payment required for a primary residence FHA loan.
- The mortgage rate comes with a term of 30 to 15 years, even if it is for an investment property
- The interest rate herein will be higher than usual but lower than commercial loans.
You must know that the loan can only be used on residential properties that have one or four units. For anything that is bigger, you will require a commercial loan.
Commercial real estate loan
You can find commercial real estate loans in different sizes and shapes. It offers a lot of flexibility to the borrower as there is no requirement for showing the credit history. Here are certain things you need to know.
- Getting a commercial loan can be quite tough because there is a lot of money involved on the line. Thus the banks will have strict requirements.
- The requirement for the payment of down payment will depend entirely on the lender and the loan type. Some of the loans will come with a 15% minimum down payment.
- Commercial loans come with a shorter repayment period. Instead of spreading the payment over 30 years, it can be paid back within 10 to 20 years.
- The interest rate will depend entirely on the loan product. But it will be a lot higher than the conventional mortgage.
As the needs of commercial investors can be quite unique, it is vital that you work with a lender who has got plenty of commercial lending experience. They will help you come up with a loan that will work for your specific situation.
Besides the banking institutions, there is a commercial real estate lender who can provide the required funding in the minimum time possible.
Pros and cons of conventional loan
- A great thing is that the interest rate herein will be a lot slower than the other available options. This means you can borrow money at a low rate. Also, this will keep the mortgage payment low. Thus maximizing the cash flow.
- Making use of a conventional loan comes with an option of extension for a long time, maybe even for 30 years, if you are purchasing a residential property
- The lenders have been in the business for quite a long time. So that the entire process will be a lot more professional and defined.
- Conventional loans no doubt comes with great rates and terms, but the investors are restricted on the number of conventional loans they can take. As of now, the limit has been raised to 10 loans. Most of the investors are not even able to get to that limit because of the price and debt-to-income ratio.
- The major drawback herein can be the slow processing time of the loan. For someone who is in need of money to make a commercial investment quick conventional loan does not serve to be a reliable option. It can take about 30 days or more to process the papers, and then then the discussion is carried out.
- The conventional lenders choose only those borrowers who are investing in a property that is in good shape. This means lenders can easily rule out a lot of properties for the investors as the majority of them make a purchase of a poor-looking property and then renovate it to improve its overall value.
Pros and cons of commercial real estate loan
- A big benefit one can expect to get with the commercial real estate loan is the fast processing time. There is a possibility for you to get the required funding within weeks, in fact, even days when you find a good lender.
- As in most cases, the lender does not we much attention to the credit score or report, it is possible for people to get the financing fast and avoid any complications.
- The documentation requirement herein can be quite low. This ensures proper assistance and faster processing time.
- As commercial real estate lenders are the experts in the industry, they can advise you about different investment properties and guarantee that you are making the right move in the industry.
- Commercial real estate loans come with a smaller re-payment term which means you must be able to pay for the amount that is due on time.
- The interest rate that comes with commercial real estate loans can be quite high, which makes it impossible for some borrowers to consider this option.
- Although the documentation requirement herein is quite low, the lenders are mostly focused on investment properties. It is vital that the borrower is able to provide a solid business plan. Based on the investment property and the business plan, the lender will decide to provide the required funding.
- In the case of commercial business loans, the borrower has to provide collateral. In case he fails to make the payment on time, then the lender has a right to use it as a mortgage and get back the amount that he owes.
Both conventional and commercial real estate properties come with a lot of challenges and benefits. You need to have a decent idea of what will be suitable for your requirement and guarantee that you choose something that will work well.
Making a decision herein can be quite complicated, which is why having professional support will make a great difference. You can consider taking help from someone who has got experience in the industry. It will ease the process for you.
Investment in commercial real estate property comes with a lot of complications. One needs to be well prepared to handle all the situations and ensure a good return on the investment. As a newbie making an investment can be quite difficult.
Besides, as things have changed a lot after the covid situation, one needs to be aware of the situation so that they are making an investment in the right place and there are no associated complications. To get the required help, you can consider Private Capital Investors.
They have got the expert who will help you connect with the best expert in town. As a trusted firm, the professionals will be there by your side to guarantee the best. You need to understand the complications and all the other associated aspects to make a wise decision.
With professional support, things will work well for you, and you will avoid any unexpected situation or loss of investment. So make sure you contact them to get the help you are in need of.