What to Consider Before Requesting a Commercial Loan
More and more investors are putting their money in commercial real estate. Increasing rural to urban migration and the development of town centers are two factors boosting the demand for commercial buildings. Plus, this trend isn’t slowing down anytime soon. In the United States, continued economic growth will lead not just to more commercial buildings, but also more warehouse spaces to house inventory.
Investing in commercial real estate can be a big step for first timers. Even seasoned investors can stumble over hurdles before seeing profits. To get the most out of an investment, it’s important to understand your financial situation. Acquiring a commercial loan isn’t always as simple as walking into a bank. Here’s a few factors for you to consider before going to a bank or private commercial lender for a loan.
The first thing you should consider is interest rate. Usually, the loan is expressed in annual percentage rate where interest is paid on top of a principal amount. The amount compounds over a given period of time, which depends on the loan amount. For first time investors, it’s important to understand that compounding of interest is not always explicitly stated.
Investing in commercial real estate requires long-term projections on earnings. This is crucial in making finance decisions prior to the construction process. Knowing the terms will ensure that you only borrow what is needed to get the project complete. Interest rates vary based on the type of loan, the amount, who you borrow with, and a couple other factors. Always research extensively before settling on your lender.
Terms of the Loan
Before signing an agreement, you have to go through the terms of the loan thoroughly. Check the various policies including: late payments, defaulting penalties, whether it is a committed or uncommitted loan as well as bilateral or syndicate. Understand that not all financial institutions are looking out for your best interest. Some may be malicious and attempt to slip unnecessary conditions into your agreement. Accepting the terms and conditions of a commercial loan is much different than online forms where you click without reading. This could cost you a significant chunk of money. Investing in a commercial property requires closely evaluating the terms of agreement before signing any paperwork.
Before any financial institution gives out a loan, eligibility of the borrower has to be ascertained. The firms will take the time to assess your background with respect to assets, income level, and credit history. If you have any sort of default history, you’re going to have more conditions included in your agreement. In those scenarios, you will be better off requesting a loan from a private lender who can be more flexible with the terms of agreement.
Lenders also have to ascertain your ability to pay. Take the initiative to check with credit bureaus to see what your score is, and how you can improve it. While this may slow your time to acquire the investment loan, it will ultimately save you some money in interest payments.
Commercial loans are typically categorized into either short-term or long-term. Most short-term loans have high monthly repayment amount. Long-term loans tend to have lower monthly repayment amounts. It is important to consider the repayment period and compare it with the anticipated size of your investment property.
If you are building a large scale, commercial office building which might take more than a year to complete, it’s wise to apply for a long-term loan to lower your monthly repayments. However, this same construction project may be broken into milestones where multiple short-term loans would be acquired. Ultimately, it is up to the investor because every situation and project is unique.
Determine Where to Apply
After comparing the terms of loan, repayment period, and interest rates, determining the source of your funding is crucial. If you plan on financing via a bank, check the loan processing and approval periods of multiple branches. When going to a private lender, find out their time to approval as well as who they’ve funded in the past. Having accuracy and clarity in the information you provide them will increase the chances of your loan being approved and processed quickly.
About Mid-Atlantic Financial Group
To learn more about Mid-Atlantic Financial Group, visit https://mafgllc.com/ and explore our website. We look forward to hearing from you!