How Do Commercial Real Estate Loans Work?

Do you need to buy extra real estate for your growing business? While this is an exciting time of business growth, it can also be a stressful one. First, you have to find the right property to fit your business (or decide on a lot you can build a building on), and then you have to secure financing.

The more you learn about how commercial real estate loans work, the better prepared you’ll be to actually pull the trigger when the right property becomes available. As a savvy business owner, you want to be able to find a commercial real estate loan that has the best terms and rates you can.

How Do Commercial and Residential Real Estate Differ?

First, it’s important to understand the difference between commercial and residential real estate. Commercial real estate refers to buildings and land that are used for business purposes. For instance, a hospital, retail store, office building or warehouse would be considered commercial real estate. Residential real estate, on the other hand, is meant to be a primary residence for people to live in.

Because of the commercial nature of the real estate you’re looking to buy, you’re going to need to find financing specifically meant for that. Most commercial real estate loans are taken out by businesses, not individuals.

How Do Real Estate Loans Work For Commercial Properties?

Commercial real estate loans actually work very similarly in nature to how residential real estate loans do. Essentially, you get a mortgage on the property secured by liens. The lender has protections against defaulting on the loan and sets the terms for rates, repayment length, downpayment and more.

For commercial real estate, you can expect to put a downpayment of around 20-30% of the property price. For the repayment terms, it can vary depending on the lender and the type of loan you’re securing. In general, though, the length of repayment is less than a residential mortgage. Many residential mortgages have 30-year terms where the longest commercial mortgage might be somewhere closer to 20 years, but as short as 5 years.

There are even shorter-term loans that only last for about 3 years or so and then come as an amortized loan – meaning you’ll have a balloon payment at the end of the terms in order to close out the loan. In this instance, you’ll want to make sure you have some cash to pay off the loan at that point.