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Understanding Commercial Property Loans

Purchasing a Home > Understanding Commercial Property Loans
Date: 10/17/2006    Understanding Commercial Property Loans

Have you been paying someone else for your office space? Have you thought about buying your own business property to quit wasting money on rent? If so, you will probably want to look into applying for a commercial property loan.

A commercial property loan is one that uses the commercial property as collateral. In that way it is similar to a residential loan that uses the acquired property as the financial promise of repayment. In many ways, a commercial property loan is different from a residential loan though. The rules and regulations are different and sometimes stricter.

While home mortgage loans usually have 30-year terms, commercial property loans have 15-year terms. Buyers of commercial property generally must be 21 years of age or older. The loans also typically have higher interest rates than residential mortgage loans, as they can be greater risks to lenders.

The greater risk comes from the way commercial property loans are evaluated. Apart from apartment buildings, most properties secured by commercial loans do not generate income of themselves. The business housed within a property is the determining moneymaker. If your business does not look like a potential successful venture, your loan will be a bigger risk and will probably be denied. In addition to your businessí proven or predicted strength, your loan status will also be based on the value of your commercial property.

You will need to have several things prepared when you apply for a commercial property loan. Lender requirements will vary but generally you should have a cash down payment on hand of 20% of the propertyís value. Lenders like to also see documentation of the source of the down payment, and how long it has been in a savings account.

Another general rule you will probably have to follow is the 60/40 rule. This means that 60% of your businessí gross income should be for operating costs and 40% of the gross building income should equate to your net income. If you do not meet this ratio, you should have a good explanation to give to your lender.

Some lenders will also require you to have 3 years of taxes, financial statements, and even insurance policies prepared to cover the building for loss and damage. In any case, for your personal security you should have some funds set aside as reserve money after the commercial property loan closes to pay for future building repairs and operating costs. If the down payment taxes your resources too much to handle this, you should consider waiting and saving up more before making your purchase.

Once you get your commercial loan approved, you can try renting parts of your building out to other businesses until your own company needs the space. This will take a great deal of the commercial mortgage off your shoulders.

You will benefit from a commercial property purchase by building your own equity in the property. And donít the tax breaks youíll get! Youíll be able to deduct portions of the operating costs and building costs to make the owning process a little easier!