Top 3 Tips for Financing Commercial Real Estate
If you’re a small business owner that has also managed residential rental properties on the side, then you may’ve given serious thought to investing in commercial real estate. Real estate is a solid investment vehicle as property values do rise over time. And managing rental properties, whether residential or commercial, can provide an additional stream of revenue. But financing commercial properties can be a little more involved than financing residential properties. With a little forethought, however, you can easily navigate the process of purchasing and financing commercial real estate.
Ensure Your Company Is Properly Set Up
First, you’ll want to set up a business entity, if you haven’t already. Commercial mortgages are not granted to individuals or sole proprietorships, but to business entities such as a limited liability company (LLC) or a corporation. The specific business entity you set up will depend on your specific needs, and you should consult with both an attorney and tax advisor to fully understand the business entity type that best meets your needs.
Choose the Right Property
Second, make sure you select the right property. Will you lease the property to other businesses? Will your business occupy part or all of the commercial property? Does the size of the property meet not only your current needs, but future needs as well? The answers to these questions will affect not only the type of commercial financing you qualify for, but also whether you could potentially qualify for a government-backed loan.
Consider Your Down Payment
Finally, consider your down payment and how much you can afford. The required down payment will be a percentage of the commercial property’s assessed value, and that percentage will be driven by factors such as your credit strength and business’s cash flow, to name just a few. An experienced business owner with good credit and cash flow might be required to put as little as 10% down, while a less experienced business owner with a lower credit score might be required to put as much as 35% down. Note also that commercial mortgages typically carry more fees than the residential mortgages most of us are more familiar with.
Whether you plan to purchase commercial real estate as an owner-occupied property for your own business or to lease it to other businesses for an additional revenue stream, commercial real estate can be a great investment. And understanding the considerations behind commercial real estate financing is not only important to your property purchase, but will also help you better navigate the financing process.