Commercial Real Estate Loans Explained in 3 Parts
When interest rates rise, it can signal a healthy economy, and many workers see it as an opportunity to ask for a raise. Business owners see interest rates differently, however, and worry that rising rates also signal rising commercial real estate rental payments.
Business owners can sidestep this by making a strategic decision. A decision many experts believe to be one of the smartest moves an entrepreneur can make: buying commercial real estate property.
There are two major advantages to buying the property where you will house your business. A fixed mortgage or payment will provide you with a more reliable budget over the long term, since your payment will not change month to month. In addition, the investment you make in the building will pay off when you decide to sell the building, perhaps to move to another, larger location.
3 Things to Know About Commercial Real Estate Loans
To get the best terms on a commercial real estate loan, it is essential you understand the three main components of these loan types. Those are the terms of the loan, the interest rate and your closing fees.
- What are Your Terms?
When researching loans, make sure you know your repayment term and schedule. You will typically encounter two types: amortized and balloon. A long-term loan with a fixed payment schedule is an amortized loan, such as a typical home mortgage. A balloon loan carries a short-term and requires a lump sum payment at the end. For most, an amortized loan is ideal, unless you know that you will have a lot of cash on hand at the end of a balloon loan.
- What’s Your Rate?
Like a home mortgage, shop around for the best interest rate available. Don’t expect home mortgage rates, however. Because businesses tend to be riskier, rates are usually higher. Remember that your business’s credit score, its age and overall success will be key when deciding what your rate will be.
- How Will You Close?
Get a good sense of what your closing costs will be, too. They are usually between .5 percent and 2 percent of the loan. You may have to pay these costs prior to loan approval.
The more you understand these commercial real estate loan components, the better chance you will have finding a good loan at a great rate. Ask a financial expert if you have more detailed questions.