If you’re thinking about dabbling in commercial real estate for business or investing purposes, make sure you know the difference between residential and commercial mortgage rates. Commercial mortgage rates are typically about 0.50 percent to 1 percent higher than the prime, 30-year residential mortgage rate.
For example, the average annual interest rate for a 30-year residential loan recently decreased to 3.89 percent from 3.94 — the average rate for commercial office properties is currently 4.14 percent, 4.34 percent for a commercial apartment property and 4.89 percent for a full-service hotel.
If you’re in the market for commercial real estate, interest rates are key to keeping your loan payments as low as possible. Compare loans from a number of lenders before you sign on the dotted line — you might be surprised that some major banks offer competitive commercial lending rates. Use these tips to find the best commercial mortgages and avoid making real estate investment mistakes.
Where to Look for Commercial Mortgages
Before you try to find the best commercial mortgages available, it’s important to understand where to look. Commercial mortgages are typically written by banks, life insurance companies and federal agencies, as well as conduit lenders, which are entities that write loans to sell to investors. Conduit loans, also known as commercial mortgage-backed securities, are pooled in a real estate mortgage investment conduit, or REMIC.
Mortgage real estate investment trusts like Blackstone Mortgage Trust, private equity lenders like Fortress Investment Group and real estate investment trusts like SL Green Realty Corp. and Vornado Realty Trust also fund commercial loans. The government, however, only offers loans for certain types of properties. The Federal Home Loan Mortgage Corp., for instance, funds mortgages only on apartment properties and the Small Business Administration and U.S. Department of Agriculture fund loans only for business owners.
Regardless of the funding source, all commercial loan rates come with criteria borrowers must meet. Non-income producing property loans take into account your personal financial history and business-related finances. To qualify for SBA loans and USDA loans, you also must meet lenders’ requirements to get the best rates.
How to Get the Best SBA Commercial Mortgage Rates
To get the best rates on an SBA commercial mortgage, you’ll need to get your business cash flow in order and create a sound business plan. In addition, you’ll need to boost your credit score if it’s not great and demonstrate your business management experience.
Your credit history — in particular, your record of paying debts — the cash flow your business generates, your management experience and the feasibility of your business plan determines the type of interest on the loan you’ll receive. Because the SBA uses this information to determine your eligibility and interest rate, you should make sure your business plan is solid, your company has cash flow that’s in the black, you have demonstrated management ability and last, but not least, you have good credit.
The Small Business Administration offers two types of commercial loans. Decide which one fits your situation best.
1. SBA 504
The SBA 504 loan requires you have a tangible net worth of less than $15 million and an average net income of less than $2 million after taxes for two years prior. You can use this loan only for designated expenses, which includes purchasing land and buildings in addition to long-term machinery and equipment.
The loan matures in 10 or 20 years and has an interest rate of 4.59 percent. To apply, you must submit quite a few documents, including a profit and loss statement and personal background statements.
2. SBA 7(a)
The SBA 7(a) loan is a general small business loan you can use for anything from purchasing real estate to funding long-term, working capital. Much like the SBS 504 loan, the SBA 7(a) requires you to meet certain criteria, including using the funds for business purposes only and investing a certain amount of equity. The variable interest rates for these loans range from about 4 percent to 4.5 percent.
Keep in mind that variable-rate commercial mortgages do not have an amortization schedule or amortization table associated with them. Amortization happens when you pay off debt via a fixed repayment schedule in regular installments. Instead, variable rates fluctuate and are based on mortgage indexes like the London Inter Bank Offering Rates or Bank Prime Loan.
How to Get the Best USDA Commercial Mortgage Rates
Because a borrower with a good personal credit history and business plan is likely to get the best rate on a USDA loan, it’s important to make sure both are up to snuff when you apply. If you don’t meet all of the agency’s criteria you will not be approved for a loan.
The USDA bolsters the availability of private credit by guaranteeing loans for rural businesses through its business and industry loan guarantees. You can use funds to buy land or buildings, refinance debt, purchase equipment or modernize your business.
Eligible areas include cities or towns with a population of less than 50,000 that are not urbanized. Loans are available for up to $25 million with terms that range from three years to 30 years, and you must provide collateral that’s valuable enough to protect the lender’s and the USDA’s interests. USDA underwriting requirements include:
- You must have a realistic ability to repay the loan.
- You must obtain feasibility studies for your business.
- Good credit is a must.
- Your business must have a certain amount of equity.
- You must have life insurance and submit personal and corporate guarantees.
No matter what type of commercial real estate loan you pursue, you’ll need to follow the application instructions exactly. If you have a high credit score, positive cash flow and proper documentation, you’ll increase your chances of getting approved for the best commercial loan rate possible.