Commercial real estate is a piece of property that produces income for those who have invested in it. Typically, this includes properties such as shopping centers, hotels, and office buildings. Often, financing is acquired through commercial real estate loans. Similar to the way a house is financed, the investors would have to pay a mortgage on the commercial real estate.
What Are Commercial Real Estate Loans?
Independent lenders and banks provide commercial real estate loans. Multiple investors get a joint loan together, which is usually for large amounts of money sometimes amounting to millions of dollars. Insurance companies, private investors, pension funds, and other sources help provide the funding for these loans.
How Are Commercial Real Estate Loans Different From Residential Loans?
While commercial real estate loans and residential loans are similar, they have some differences. Commercial loans are usually made to business entities and not individuals, like residential loans are made to. Commercial loans range from 5-20 years and the amortization period in many cases is longer than the loan. Residential mortgages are amortized, and the most common length of a mortgage is 30 years. Commercial loans have a loan-to-value ratio of 65-80%. Residential loans have a higher loan-to-value ratio, going up to 100%.
What Is the Repayment Schedule For Commercial Real Estate Loans?
According to the May 2021 RCA CPPI: U.S. summary report, the commercial real estate prices rose from April 2020 to April 2021 at an annual rate of 1.3%. As previously discussed, amortization periods may be longer than the loan. An example of this is a loan that has a term of 7 years, but an amortization period of 30 years. The payments that are made are only for a period of 7 years, but the amounts are paid as if the loan is as long as 30 years. Typically, there is a balloon payment at the end of the 7 years that is for the remaining balance of the loan.
When you are interested in purchasing commercial property, commercial real estate loans may be the best option to allow you to acquire the building or buildings in which you are interested. For more information on this topic, be sure to reach out to West Coast Commercial Capital LLC.