Your business has decided to jump in the commercial real estate market. Whether it is to buy a property for your own business operations or an investment to make money, there is a lot to know about commercial real estate and mortgages. You may be familiar with the structure of residential mortgages, but how do they compare to commercial mortgages?
Commercial mortgage cover buildings and properties that are used exclusively for business purposes, generally not for personal housing needs. Often that means the commercial mortgages are made to business entities rather than to individuals as in a residential mortgage. Examples of business entities include corporations, funds, trusts, developers, or partnerships.
Another difference in commercial mortgage is that they are not typically amortized like residential loans are. Commercial real estate loans often have terms of 5 to 20 years instead of 30 and are followed by a balloon payment at the end – a large lump sum to be paid off. Commercial loans also have slightly higher interest rates than residential mortgages. For example if residential rates are running around 5%, commercial loan interest rates might be about 7%.
Loan-to-value ratios are often lower with commercial mortgages than with residential ones. A typical residential loan may allow for an LTV ratio of up to 95% whereas a commercial mortgage LTV will usually be somewhere between 65% and 80%. This is because these purchases are generally so much larger that the lender has to compensate for the risk by having the borrower put down more money upfront.
Commercial mortgages also often include stricter prepayment penalties than residential loans. This is a fee or other monetary consequence that will be applied if the borrower repays the loan before it matures. This basically ensures that the lender will recoup all of his fees from originating the loan.
Once you are familiar with the specific features of commercial loans, an investment in commercial real estate can be a very profitable move for your company.