For most people, commercial real estate may seem like an investment that’s out of reach. But it may be more attainable than you think. There are many financing options available to help you purchase your first commercial property, including low-cost SBA loans designed to help small business owners acquire property. Below are some of the most common financing options for commercial real estate, though there are many more to explore. Consult your advisory team to help you decide which options are best for you.
These loans most closely resemble a consumer mortgage, but are typically made to businesses rather than individuals. Since the purpose of commercial real estate is to generate income, lenders will look at the ability of the property to generate income greater than the debt payments. Unlike residential loans, the commercial loan period is short with a long amortization period and a large balloon payment at the end of the loan period.
Hard Money Loan.
Hard money lenders are typically private companies or individuals who offer short-term loans at high-interest rates. Lenders evaluate the loan based on the perceived value of the property and not on the borrower’s credit history. Investors will often utilize hard money loans to quickly finance deals in the interim while negotiating a longer-term bank loan.
The United States Small Business Administration (SBA) offers two loan programs for commercial real estate financing. Similar to how the Federal Housing Administration guarantees FHA loans, the SBA provides guarantees for commercial loan programs. SBA-backed loans help the borrower by increasing credibility and reducing risk for the lender.
SBA 7(a) Loan.
The 7(a) loan is the SBA’s most common loan program. This is the best option for real estate business purchases, but the funds can also be used for working capital, inventory, debt consolidation or refinancing. 7(a) loans work best for smaller projects and are the quickest and easiest of the SBA loan programs. Eligibility factors are based on what the business does to receive its income, its credit history, and where the business operates.
SBA 504 Loan.
Small business owners thinking of purchasing or renovating commercial real estate should consider the SBA 504 Loan Program. The 504 Loan Program provides long-term, fixed rate financing of up to $5 million for major fixed assets that promote business growth and job creation. Loans backed by the Small Business Administration are favored by lenders. The 504 loan program works best for larger investment projects, such as those valued over $1 million. The investor must put down 10 percent of the loan amount as the down payment, while 40 percent of the loan is sourced from an SBA Certified Development Company. The remaining 50 percent is borrowed from the lender.
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