How to Qualify for a Commercial Real Estate Loan

Many real estate investors follow the old adage of “use other people’s money” when building their commercial real estate, or CRE, portfolio. Since CRE deals are usually not owner-occupied properties the financing for these deals vary and do not come with the same regulations and requirements as loans used for residential home purchases. In most cases, qualify for a commercial real estate loan the property value is one of the most important factors,

1.      What is commercial real estate investing?

Commercial real estate is traditionally considered any property that is not used for residential owner-occupied purposes.  This includes investment residential property, retail stores, strip malls and office buildings. Investors like CRE opportunities because they usually have greater cash flow because they typically have more than one tenant with longer leases when compared to residential tenants.

2.      What are the types of commercial real estate loans?

Investors have several choices when searching for a CRE loan from a large number of lenders. Most CRE investors will use a bank, commercial, or hard money lender.

Most banks provide commercial financing for real estate deals. This financing is typically for larger transactions and will require above-average credit scores for the business or individual lender. As a result, the loan will typically have favorable terms like lower interest rates and longer payback periods. However, this traditional lending process requires extensive documentation and is usually slower than other financing options.

If a bank loan is not a viable option for your deal, there are many non-bank lenders that provide commercial real estate loans for small- and medium-sized companies. The terms with these lenders are not as favorable as a traditional bank with higher interest rates and shorter payback periods, they often have faster approval/closing times with less rigid documentation requirements and lower fees and closing costs.

Finally, investors can consider hard-money lenders if banks or non-bank commercial lenders are not options. Hard-money lenders almost exclusively evaluate their loans on the property value of the real estate you want to purchase. These lenders are normally private companies or individuals that don’t have the same regulations as traditional lenders.  As a result, they can, and do, make up their own requirements. As result, these loans often have the highest interest rates and shortest repayment periods. However, they also have the fastest approval process and can be a great option if you need access to capital fast or if you have been denied by traditional lenders.

Like with any other loan, shop around to see what lenders have to offer and confirm if they are participating in the Small Business Administration commercial real estate loan program. The ultimate decision regarding the financing of your CRE loan will depend on the property you are acquiring, your business credit and possibly your personal finances.

3.      Commercial real estate loan requirements.

One of the benefits of a commercial real estate loan is that it can require less documentation and can close faster. The interest rate on CRE loans may be higher than loans for your personal home but for investors, the efficiency of the closing process is critical. But what do commercial lenders look for?

Probably the most significant factor in getting financing for your CRE deal is the property you want to acquire. The property is collateral for the loan. To protect their investment, the lender will attach a lien on the property that allows them to recoup their investments through foreclosure if you fail to make the mortgage payments.

If you are applying for a CRE loan as a business, lenders will also check your business’s credit score to determine if you can obtain a loan in the name of your business.  This score will determine your interest rate, down payment requirement and the length of the loan. Before applying as a business make sure you have the proper business structure like a limited liability company or an S corporation to avoid the loan being considered a personal loan. This way you can avoid exposing your personal assets in case something goes wrong with the investment.

There are some situations where your personal finances will be considered for a commercial real estate loan. If you have a new business or a small company like an LLC with two to three members, lenders may want to still check your personal credit score before approving financing. A low personal credit score could limit your ability to obtain a commercial loan for your CRE investment opportunity.

4. What if I need help?

If you are considering investing in commercial real estate, you should consider professional help. You will benefit from the help of a licensed and qualified realtor in your area to help you understand the market trends in the market. Additionally, a banker or mortgage professional can help you understand your financing options based on your current situation. These professionals can help you with your search, understanding current trends in the market, and help find the right loan products for you and your business.