Commercial Real Estate Mortgage Loan - 3 Things To Note When Getting A Commercial Real Estate Mortgage Loan
Its good news for commercial real estate mortgages as, despite of the ongoing turmoil in many of the submarkets, they remain comparatively unaffected. Most experts in the commercial real estate mortgage loan market are of the opinion that at the start of the 3rd quarter of 2007, the top of the commercial real estate market is pretty much in the rear-view mirror.
Considering that commercial real estate mortgage loans are valid means for many of you to buy, construct or refinance commercial real estate owned by you, these loans are designed to help you invest or purchase residential income generating real estates like commercial office properties, retails properties and warehouses and even development projects such as condos.
Increasing Popularity of Commercial Real Estate Investing
Due to the increasing popularity of commercial real estate business, this is definitely a good time for investment. According to a market study conducted in 2004, the prices of commercial real estate rose dramatically by 26% for apartment complexes, 21% for industrial and warehouse properties, 14% for retail and 6% for commercial office properties.
The declining popularity of residential real estate investing can be attributed to the vulnerability of this segment. For those of who you may have invested in single family homes and developing properties like condominiums at a time when this housing bubble was on the verge of bursting, may now be blaming yourself for not being able to acknowledge the warning signs and the bad timing for investing. A downward trend in market values coupled with slow sales and lack of liquidity along with property management issues are causes for increasing stress-levels!
Why Commercial Real Estate Investing Makes Sounds Business Sense?
Commercial real estate on the other hand is different. Since it’s not dependent on the emotional desires and the affordability factor of an individual, the value of commercial real estate is mostly driven by the revenue generated by your property. Ex. Multiple tenancy in an apartment complex you own is sure to give you a solid cash flow every month.
Furthermore, you don’t have to constantly worry about the maintenance of the commercial property as is the case with residential properties. The expenditure is limited and upkeep much less demanding. Commercial real estate investing gives you the means to pay off your commercial real estate mortgage loan with various options including the very easy net lease investing. A passive investment, this is very beneficial for you as the owner because your business operating tenant will be responsible for paying off all expenses like insurance, maintenance, and taxes for the duration of the lease agreement.
What Are Commercial Real Estate Mortgage Loans?
Not all of you may have the means to purchase commercial real estate without the help of a commercial real estate mortgage loan. Therefore, it’s important you understand what commercial real estate mortgage loan means for you.
Commercial real estate mortgage loan is offered at higher rates of interest than residential real estate mortgages and they usually have very short repayment terms. Of course the success of being able to arrange finance for the commercial property will depends on factors such as whether you apply through a reputable mortgage broker or banker for commercial real estate mortgage loan and whether you are investing in the property for your own business or as an investment.
Top Three Considerations When Buying Commercial Real Estate Mortgage Loan
There are several important issues that you will need to address before you start shopping for commercial real estate mortgage loan. Let’s take a look at the 3 main ones.
Can I Afford The Mortgage?
An important factor for getting a commercial real estate mortgage loan is a strong credit and an ideal business plan, but the most important factor that a lender will look for is the cash flow of your business. The two main ratios any lender will look at to determine your monthly payment making ability are: loan to value and debt service coverage.
Loan-to-Value Ratio (LTV) – Simply put it’s the amount you would like to borrow divided by the appraised value of the commercial property. The lower the LTV ratio, the better your chances of getting lower rates of interest.
Debt service coverage ratio (DSCR) – This is regarded as a financial buffer to ensure that your commercial property will generate surplus income aiding you to make the necessary monthly mortgage loan payments. When your net income is divided by your monthly interest rate and mortgage payment, lenders are able to figure out your DSCR. If your DSCR is a minimum of 1.25 or more, you’ll be considered as low risk candidate for commercial real estate mortgage loan.
How Much Money Do I Need To Get Started?
A typical commercial real estate mortgage loan starts at $400,000 to $500,000 or more. For such a large sum, you will need to make a significant down payment. The amount of down payment is usually around 20-30% of the loan amount, if you are lucky you may just need to pay 10% down payment. You must remember that your commercial property is the collateral for the mortgage and if you miss your payments or if you DSCR is below 1.25 anytime, the lender or bank can foreclosure your property to recover their losses.
What’s the Ideal Period of Repayment for Commercial Real Estate Mortgage Loan?
This term is usually 15 to 20 years. But you can also find commercial real estate mortgages for up to 30 years. Such long-term loans help to lower your monthly mortgage payment. If you consider yourself a good candidate to pay off your loan in a few years only, you must collect more information on early repayment charges (ERC). Lenders can add a penalty incase you decide to pay off the commercial real estate mortgage before time.
You must always seek the services of a professional commercial real estate mortgage loan broker to ensure you get the best deal!
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