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Something You Need To Know About Commercial Loans For Real Estate

Commercial loans for real estate are a lot different in comparison to applying for residential loans. Actually, they’re more complicated as they’re carrying terms and conditions that are totally different than residential loans. As a matter of fact, this is one of the many reasons why a lot of investors are afraid to venture in commercial real estate market.

Small investors of residential real estate are normally limited to somewhere around 4 to 10 properties valued between hundreds to thousands of dollars before lenders come to a conclusion that it’s enough risk level and no further loans could 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. In addition to that, recent studies showed that most businesses failed due to the lack of capital to meet their needs. For this reason, banks are requiring businesses to maintain a good amount of cash reserve that could be drawn on if the cash flow isn’t adequate in making the loan payments.

This financial requirement is on top of the hefty down payment that has to be made. Borrowing as much cash as they could get even at higher interest to provide enough capital in building the business and increases the cash flow is a good strategy that various commercial investors do.

If you want a less stricter requirement for commercial loan, then you should consider non-bank lenders or private lenders. There are a number of lenders who are requiring lower down payment that can range of 10 to 15 percent. Believe it or not, most of these lenders actually agree to carry loan amount of 20 to 30 years until it is paid completely. On the other hand, they are charging higher rate of interest that is a bit higher compared to 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 high interest on the period of loan and comparing it with the cost that you 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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