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 one of the reasons why there are many investors who are afraid to venture in commercial real estate market.
Small investors of residential real estate are often limited to somewhere around 4 to 10 properties valued between hundreds to thousands of dollars before lenders conclude that it is the enough risk level and no further loans can be made. The requirements for applying commercial properties significantly vary between banks and private lenders as well. In addition to that, loans are held in portfolio of single lender might vary according to 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. Moreover, according to recent studies, it showed that many businesses have failed because of the lack of capital to meet their needs. Banks require businesses to maintain a good amount of cash reserve that may be drawn on if the cash flow is not adequate in making the loan payments for this reason.
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.
When it comes to non-bank lenders or private lenders, they are typically offering less rigorous requirements for commercial loans. There are many lenders who require lower down payment that can range of 10 to 15 percent. Typically, these lenders are agreeing to carry loan amount of 20 to 30 years until it is paid completely. The thing is, they charge higher rate of interests that are a bit higher than 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.
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