Whether a real estate investor is seeking financing for office buildings or multifamily properties, they will most likely want a reasonable interest rate on their commercial real estate loan.
Mortgage lenders range from traditional banks and credit unions to government-sponsored enterprises like Fannie Mae and Freddie Mac.
Several factors, such as the initial down payment and type of property, can ultimately affect the interest rate on a commercial property. In addition, a “good” interest rate is highly subjective since every business and individual real estate investor has a unique financial situation.
Find out average interest rates in commercial real estate lending and critical factors to consider when applying for a loan.
What Is the Average Interest Rate for a Commercial Property?
Based on considerations like the borrower’s creditworthiness, repayment terms, and type of loan, commercial real estate loan interest rates can span between 2% and 18%.
In general, longer repayment terms typically mean lower rates, while shorter terms can mean higher rates. The current market conditions may also affect interest rates for commercial real estate loans.
What Are the Different Types of Commercial Real Estate Loans?
Borrowers can choose from multiple types of commercial real estate loans. These types of loans range from conventional mortgages, comprising fixed rates and terms for repayment, to hard money loans, which usually provide financing to individuals who cannot otherwise afford a loan on a property.
Conventional Mortgage Loans
Financed by traditional banks and other private lenders, conventional commercial real estate loans offer interest rates starting at 3 percent and repayment terms from five to 30 years. Conventional mortgages usually require a down payment of up to 20 percent.
Bridge Loans
Commercial bridge loans are short-term business loans with amortization of up to two years. One or more lenders provide these loan programs until the business or individual finds a long-term source of financial backing. Some lenders have specific criteria for approving bridge loans.
For example, they may require a low debt-to-income (DTI) ratio showing they can make monthly payments. A low DTI shows lenders that the borrower can handle debt, while a high DTI may make it difficult to qualify.
Government-Backed Loans
Government loans for small business owners, such as the SBA 504 loan, offer reasonable loan terms for commercial real estate, including interest rates consisting of around 3 percent of the amount financed and a repayment period maximum of 25 years.
On the other hand, a real estate investor may qualify for an SBA 7(a) loan, which entails partial financial support by the US Small Business Administration and carries either a fixed rate or variable rate based on the federal prime rate.
Conduit Loans
Conduit loans are a type of commercial real estate financing in which investors can borrow money to purchase and construct real estate.
They are a form of commercial mortgage-backed securities (CMBS) financing, and the term of a CMBS loan is usually between five and 10 years, but some lenders offer a shorter term. Conduit loans are available for commercial real estate like office buildings, retail, industrial, self-storage facilities, and multi-family properties.
Hard Money Loans
Unlike traditional lenders, hard money lenders focus more on a borrower’s property and less on their credit score. However, some lenders will still do a credit check or have minimum credit score requirements.
In general, this type of loan is similar to a bridge loan. Since government regulations do not bind them, hard money lenders may not be as strict as traditional lenders, and they can offer more flexible terms.
How To Get a Good Interest Rate on a Commercial Property
In terms of commercial property loans, it’s essential to understand which factors to consider to avoid a higher interest rate. From the loan-to-value (LTV) ratio to the property type, here are considerations to consider when applying for a commercial real estate loan.
Consider the Loan to Value Ratio
The loan-to-value (LTV) ratio allows lenders to determine how much risk they take when financing a commercial property. The ratio is typically calculated as the difference between the appraised value of the property and the mortgage amount.
The LTV ratio may majorly affect the total amount you can borrow. A good LTV is typically 80 percent or lower. Anything higher could require additional money down or raise borrowing costs, resulting in the lender refusing a residential loan for an owner-occupied property.
A high LTV is considered a risk for the lender and will require residential mortgage insurance. Loans with LTVs over 95% are rarely approved. A low LTV means the lender is taking less risk with the loan, and a loan with a lower LTV may have lower interest rates and payment options.
Research the Lenders’ Prime Rate
Calculated as a percentage of the loan’s capital, a lender’s prime rate is the amount the creditor charges on the loan. It varies wildly, depending on the lender and the loan amount, and is an essential factor to consider when choosing a lender.
Account for the Property Type
Market conditions like supply and demand can affect interest rates. While shopping malls in certain metro areas may not be in high demand, there could be a need for office buildings in that exact location.
Commercial mortgage lenders often try to determine a property’s risk and return profile before agreeing to finance a real estate loan.
This is why due diligence remains an integral part of the buying process. The due diligence involves addressing all of the details and liabilities associated with a potential property. It also helps prospective buyers evaluate a property’s viability and a possible increase in cash flow.
Which Lenders Offer a Good Interest Rate on a Commercial Property?
Commercial mortgage rates range depending on multiple factors, including down payment and property value. While financial institutions and traditional private lenders could provide fair interest rates, innovative real estate financing companies simplify commercial lending and the underwriting process.
Whether you go for a conventional mortgage, a hard money loan, or a government-backed loan, it’s hard to pin down an exact figure for a “good” interest rate for commercial properties. Still, you’ll want to find a loan with an average rate (2% and 18%) and the shortest repayment term.
