How to Get a Commercial Loan for Rental Property

Commercial real estate has had a few volatile years with the global pandemic and looming recession. Yet it continues to boom, with house prices up and a healthy seller’s market across the US. So how do you manage to capitalize on it? 

One way is by purchasing property for your business. Read on as we discuss how to get a commercial loan for rental property. 

What Is a Commercial Loan?

A commercial loan is an arrangement between a business and a financial institution. The business is the borrower, who will apply for a loan to fund capital expenditures or costs. In the case of a commercial loan for rental property, the business loans money to fund a rental home, office, or other property. 

Loans of this type will typically range from five years to less than twenty years. They differ from residential loans as the amortization payment is often longer than the term value of the loan. 

Commercial Loan Repayment Schedules

In a residential loan debt gets paid off in regular installments. Once these regular installments cease, the debt is repaid. However, this is different from a commercial loan. 

The amortization period in a commercial loan is longer than the loan period. This means a borrower will pay a series of installments, then one large fee in a balloon payment. Monthly repayment amounts, their length, and the amount of amortization time impact the loan terms. 

Types of Commercial Real Estate Loans

Not all commercial loans for rental property will work in the same way. Each will have its eligibility requirements and terms or conditions.

Small Business Loans

The US Small Business Administration has a wide range of loans to provide financial assistance for smaller companies. They each have very specific criteria and some may stipulate that they can not be used for property. However, they may have something that suits your needs.

Commercial Bridge Loan

Commercial bridge loans are short-term options that allow a company to get finance while they wait for longer-term loans to become available. They can be used to finance up to 90% of a property’s long-term value. This allows people taking out a loan to compete with cash buyers, and loans do not tend to last longer than three years. 

Hard Money Loan

A hard money loan is secured by real property and the lender is typically an individual or company, not a financial institution. As they use the value of the property as collateral and do not look at credit history, they are great for property flippers looking to pay back the loan quickly. 

Stated income commercial lenders offer quick, accessible hard money loans. Doing the application is also simplified, often using an online form to take the details and contact the potential borrowers with a decision quickly.  

Commercial Loan for Rental Property Pre Payment

Most commercial loans will have a prepayment penalty. If the debt gets settled before the maturity date, then a prepayment will protect the lender’s predicted yield. You should know the type of exit penalty before you take the loan. 

Prepayment

This is the most common and well-used payment. The designated prepayment penalty amount is multiplied by the outstanding balance.

Interest Guarantee

A pre-arranged amount of interest is guaranteed to the lender, even if the loan is paid early. For example, it may be 70% for 50 months followed by a 10% exit fee. 

Defeasance

This is a little more complicated and involves the use of collateral. When the loan gets agreed upon, items will go up for collateral that the bank can seize if repayments don’t get made. In this procedure, new collateral gets exchanged for old collateral.

This happens instead of cash payments to the lender. It may reduce fees but often comes at the price of higher penalties.

Lockout

This is the most inflexible type of loan. You are contractually unable to pay off the loan before the specified date. 

Will I Qualify for a Commercial Loan?

This all depends on your personal circumstances and the type of loan you apply for. One of the most important commercial loan tips is to improve your business credit rating before you apply. Not only will this make you more likely to get accepted, but you will also qualify for better repayment terms. 

Generally, your credit score will need to be a rating of 700 and higher. You can get loans that have less stringent lending criteria, particularly if you put up collateral. However, they will incur higher rates. 

How Much Down Payment Will I Need?

The amount of down payment you will need depends on the property and loan. You should also be aware that you will need significant cash reserves to get accepted for most loans. 

When you own a primary residence, you will need to have at least six months of mortgage payments in reserve. These must also be in place for the property you plan on buying. If you have other rental properties you may also need it to cover them. 

Requirements will become stricter with the more loans you take out. Required credit scores must be higher and your cash reserves must increase. 

How to Get a Commercial Loan for Rental Property

Now you know how to get a commercial loan for rental property, start to plan. Decide what type of loan is best and begin to improve your business credit score. Get quotes from a few lenders and see which suits your needs best. 

If you found this article helpful, we have many more to assist. From loans to investments, we can help get the most from your money in the coming year.