Commercial financing options are vastly different than those available for residential properties. If this will be your first commercial loan, I strongly recommend you review the differences before searching for your first investment property. Why are the loans so different? Think of it this way, the primary purpose of commercial property is to generate income. In contrast, residential loans are made for the purpose of providing a borrower with a place to live. As such, commercial lenders are much more concerned with the income producing capabilities of the property rather than your personal ability to repay the loan. While you must still have good credit and the ability to meet the initial down payment requirements, lenders will be more interested in whether the property will generate the monthly income necessary to pay expenses including insurance, taxes, and your loan payment, and still have money remaining for keeping the business viable.
Lenders view commercial loans as a higher risk than residential loans. This additional risk means commercial borrowers can expect larger down payments (at least 20%), higher interests rates, higher closing costs, and shorter loan terms. Commercial loans are typically fixed for 3, 5, or 10 years and often include prepayment penalties. In addition, commercial lenders are not required to abide by governmental regulations designed to protect consumers in residential transactions. Commercial borrowers can expect longer closing times and more required documentation such as costly appraisals and possibly even environmental studies. As determining risk is often difficult for lenders, most lenders prefer to deal with landlords as opposed to the business owners themselves. By dealing with landlords, lenders can focus on current rents and occupancy rates as opposed to the specifics of individual business plans.
Finally, because there are many different types of investment properties (Retail, Office, Medical, Warehouse, Hotels etc…) there is also a greater degree of specialization among capital sources. Many lending sources specialize in lending on a particular type of commercial property. Loan packages are highly customized by property type rather than standardized as in residential loans. As you can see, commercial financing is very complex and requires proper guidance before moving forward. However, the advantages and potential financial rewards of purchasing investment properties keep buyers in the market.