As your business grows and becomes more profitable, you might believe that you are ready to purchase commercial property to house your business. It would seem that you would only be increasing your revenue by owning the building and renting unused space. But be certain that you understand the true cost of commercial real estate loans before you apply for a loan.
As the owner of a successful business, you might begin to think that you are wasting money renting a building when you could buy a commercial property. Not only would you have the tax benefit of owning a property but you could also offset the cost of the loan by renting out part of the space to generate revenue. But before you begin to apply for a commercial mortgage, you should be sure that you are aware of all of the costs that are involved in the process.
In general, a commercial mortgage interest rate is going to be determined by your business’s creditworthiness and possibly by the credit score of the owners if the business is less than five years old. An additional factor is the value of the property as it compares to the amount that you are borrowing. Due to the fluctuation in commercial real estate values, lenders prefer to see instant equity in the property so they require a down payment that can sometime be as much as 25% to 30% of the loan. In most cases, the larger the down payment then the better the interest rate will be. In short, the interest rate is lower because the lender is taking less risk when the equity in the property is greater.
In addition to the interest that you will be paying on a commercial mortgage, there are fees that you will also need to pay. In some cases there are fees that you must pay even before the loan is approved. These can be called an application fee or a processing fee but they are due before you ever know if you are going to get the loan. If you are a young company and have little credit history then your choice of lenders could be limited and you will simply need to pay the upfront fees. If you are more established and have many options for lenders, then select the one or two which are willing to process your application for free.
In addition to fees for processing the application, there will be fees that are bundled and then added into the cost of loan. You will be paying for a property appraisal, a survey of the property, legal fees and also loan origination fees. Also be sure to read the fine print to see if there are any fees or penalties for paying the loan off early. This can be added to ensure that the lender gets the full benefit of the interest that would accrue on the loan.
Getting a commercial loan to purchase a property for your business is a long process that can require a lot of attention and money. Having a good understanding of the costs involved in commercial real estate loans can help you to determine if you really can afford to own commercial property and if you are willing to invest the time to see the
application process through.
Dennis Dahlberg Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.