When people think of commercial real estate investing, they most often think about office space, but this area of investing encompasses much more. Even rental property and farms are considered to be commercial real estate opportunities in that they generate a profit. For this reason, the requirements for qualifying for a loan are a little different than they would be, when pursuing a home loan for a property you intend to occupy.
Strengthening Your Wealth Management Portfolio
In most cases, banks prefer to approve credit to those who already have investments in commercial real estate, because it shows they have the experience. However, if you’re just getting started, lenders will look at your personal wealth as an indication of how you manage money. Lenders want to see a good repayment history, so your credit is especially important in trying to get approved for your first commercial real estate loan.
Even with excellent credit, your lender will likely look for you to guarantee the loan. Their primary concern is that they will be able to get their money back. This is a larger concern with commercial real estate, because, as previously mentioned, the terms won’t be the same as with a residential home loan.
When dealing with commercial real estate loans, you should expect to be a higher interest rate. This is because loans for commercial purposes are not backed by government agencies, such as Fannie Mae or as in FHA loans. The repayment terms are shorter as well.
In a traditional home loan, you may have 15 or 30 years to repay the loan. Some lenders offer a third option of 25 years. When dealing with loans for commercial real estate purchases, those terms are shorter. They can be as brief as five years in some cases. Depending on the circumstances, you may get a repayment option of 20 years, but don’t expect anything more than that.
It Takes More Than Just Good Credit
One more thing to consider before applying for commercial real estate financing is your debt to income ratio. Along with credit history, this will also weigh heavily in whether or not you will be approved for the loan. Your debt to income ratio is the amount you owe versus the amount of income you earn each month. Ideally, your income should be high enough that you will have a significant surplus each month. If this is an area in which you may not meet the lender’s needs, you can improve your situation in one of two ways. You can either find a way to reduce your debt or you can increase your monthly income.
When it comes to commercial real estate investing, getting financing for your first investment can be tricky. It will certainly take long-term planning on your part, so you can be prepared to meet the lender’s requirements. However, once you get that first loan and prove you’re a worthy risk, future financing applications will be more readily approved.