What Is Commercial Real Estate?

What Is Commercial Real Estate?

Commercial real estate is income-producing property used solely for business (rather than residential) purposes. These properties include retail stores, offices, restaurants and warehouses among other types of commercial space. In general, they are making money while you sleep.

What Is a Commercial Real Estate Loan?

Just as with home mortgages, banks and independent lenders are actively involved in making loans on commercial real estate. Commercial real estate loans are often more complicated than residential loans because they have a longer maturity period and require collateral.

The length of time that you hold the property determines how much interest will be charge on your loan. If you take out a 30-year loan for a $3 million property and hold it for three years, you will pay $1,000 per year in interest. If you hold it for 10 years, you will pay $400 per year in interest.

Loan Repayment Schedules

A residential mortgage is a type of amortized loan in which the debt is repaid in regular installments over a period of time. In most cases, the loan amount is not paid off in one lump sum. Instead, payments are make to the lender on the scheduled date each month or quarter until the total loan balance has been paid off.

The borrower makes monthly payments to thee lender and then sends them directly to the property owner. The property owner then sends a check to their mortgage servicer, who pays off all outstanding balances with your bank account.

Commercial Real Estate Loan Interest Rates and Fees

Interest rates on commercial loans are generally higher than on residential loans. Also, commercial real estate loans usually involve fees that add to the cost of borrowing.

However, as a borrower, you may be able to get a better deal by comparing several different sources of funding and negotiating with your lender.

For example:

You can shop around for interest rates and fees by shopping around for the best rate available from the lenders who have most competitive loan-to-value ratios (the ratio between your total debt and the value of your home). This is calle shopping for the “best” rate on an adjustable-rate mortgage (ARM).

You can also compare rates offered by different types of lenders — including banks, credit unions or mortgage companies — or loan terms that vary in terms of payment frequency and interest rate.

Prepayment

A commercial real estate loan may have restrictions on prepayment, designed to preserve the lender’s anticipated yield on a loan. In addition, it may be difficult or impossible for a borrower to make interest-only payments on the loan if he or she does not have enough cash flow.

If you have a commercial real estate loan and want to prepay some of your debt, you may run into problems with your lender. You may also encounter legal issues if you are late paying your taxes or other bills that are due at the same time as your loan payments.

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Conclusion

Using commercial loans from a bank, you can purchase commercial real estate. Without putting much (if any) of your own money into it. However, like all loans, commercial mortgages are opportunities for borrowers to spend more than they can ultimately afford. As with residential mortgages, be sure you fully understand how the loan works before taking on a large balance.

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