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Something You Need To Know About Commercial Loans For Real Estate

Compared to applying for residential loans, commercial loans for real estate are a lot different. The truth is, they are a lot more complicated because they carry terms and conditions that are totally different than residential loans. This is among the reasons why many investors are afraid to venture in commercial real estate market.

Small investors of residential real estate are normally limited to somewhere around 4 to 10 properties valued between hundreds to thousands of dollars before lenders come to a conclusion that it’s enough risk level and no further loans could be made. The requirements for applying commercial properties can vary significantly between banks as well as private lenders. Not only that, loans are also held in portfolio of single lender may vary on the risks perceived by lenders.

Most of the time, banks want clients and their partners to come up with 20 to 25 percent of the property value as down payment. In addition to that, recent studies showed that most businesses failed due to the lack of capital to meet their needs. And in relation to this, banks require businesses to maintain good amount of cash reserve that may be drawn on if the cash flow is not enough to make repayments to the loan.
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This financial requirement is on top of the hefty down payment that has to be made. A good strategy that several commercial investors do is borrowing as much cash as they could get even at higher interests in order to provide enough capital in building out the business and therefore, increases the cash flow.
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If you want a less stricter requirement for commercial loan, then you should consider non-bank lenders or private lenders. There are many lenders who require lower down payment that can range of 10 to 15 percent. These lenders typically agree to carry to loan amount of 20 to 30 years until it is paid completely. They’re charging higher rate of interest on the other hand which is a bit higher when compared to 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.

Emergence of non-banking or private lenders is challenging banks on traditional terms of loans. While banks continue to implement stricter requirements to sanction the commercial loan, private lenders move towards bigger share as it makes it easier to qualify.