Commercial real estate loan rates what borrowers need to know

Investors need to be aware of how their commercial real estate loan rates can change over time and how their loans are structured. However the type of lender will have the biggest impact on the loan rate.

Something every borrower should consider is how loan rates can change over time. A real estate loan can come at a fixed or a variable rate. A fixed rate loan remains at the initial interest rate over the entire course of the loan. Borrowers will make the same payment every month over a given period. Few borrowers can qualify for a fixed rate commercial loan.

Variable rate loans are more common when it comes to commercial real estate. The interest payments on variable rate loans can change over the course of the loan. Any increase or decrease in interest is usually tied to the prime (or market) rate. Prime rates generally change every 1 to 5 years and many variable rate loans are offered as the prime rate plus a certain percentage of interest. For example, if the current prime rate is 4 percent, a bank could offer a loan as prime plus 3.5 percent so the initial interest on the loan will be 7.5 percent. However the interest on this loan will fluctuate and will rise or fall according to the prime rate.

Interest rates are not the only thing borrowers should be aware of, as the structure of a commercial loan is equally important. Some loans are fully amortizing which means that the interest payments and the principle of the loan are fully paid off once the loan expires. Some loans are also structured with variable rates that reset after a given period. Like any variable rate loan you pay a given interest rate for an initial period. After this initial period the interest rate will reset and the borrower will pay at the new rate until the next reset period or until the loan matures. However balloon payment type loans account for the majority of commercial mortgages. In technical terms balloon loans have longer terms than their amortization periods. This means a certain amount of interest and principle will need to be paid off once the loan expires. Borrowers with this type of loan will need to plan ahead and calculate what the balloon payment will be when the loan matures, or make plans to refinance ahead of time. With a balloon loan an unprepared borrower could easily default.

The biggest factor in when it comes to commercial real estate loan rates is the type of commercial loan a borrower takes out.

Government backed loans and conventional bank loans usually offer the lowest interest rates. SBA 504 and 7a loans offer the lowest interest rates overall. The government guarantees a certain percentage of these loans and the risk for the mortgage provider is alleviated, which results in lower interest rates. 7a loans are easier to qualify for and are usually for smaller amounts than 504 loans. The interest on a 7a loan can be variable, but usually ranges from 6.5 to 9 percent. SBA 504 loans are intended for loans over one million dollars and are usually issued in “stacks.” 50 percent of the loan comes from the bank, 40 percent from an SBA provider and 10 percent of the loan is the borrowers down payment. The bank issued portion on a 504 loan is usually variable while the SBA backed portion being offered at a fixed rate. The average rate on a 504 loan currently ranges between 3.96-4.43 percent, making 504 loans the cheapest type of commercial loan. Banks also offer conventional loans that are not backed by the government. Borrowers seeking a commercial loan from a conventional bank should have a good credit profile, expect to pay a higher variable rate over an SBA loan and have at least a 20 percent down payment on hand. However some borrowers may not qualify for a low rate SBA or a conventional bank loan

Many borrowers won’t meet SBA or conventional bank requirements. Hard money lenders may be a reasonable option.

Hard money lenders usually charge the highest interest rate when compared to other commercial mortgage providers. The average interest on a hard money loan is usually 10 to 18 percent. These high rates reflect the additional risk involved with hard money lending. Hard money lenders consider the value of the asset being borrowed against over a borrower’s credit profile. Hard money loans are generally short term, with repayment schedules averaging between 6 and 12 months. In spite of their expense a hard money loan may be a good option for commercial real estate investors without a good credit profile and who need a “bridge loan” to more conventional financing.

Borrowers should know whether their loan is fixed rate or variable and whether their loan is fully amortized. A borrower’s credit score will determine whether they qualify for a lower rate SBA or conventional bank loan, or whether they should seek out a hard money lender.

Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

Technorati Tags: commercial loans,commercial lending,commercial mortgage

Risky Business: How To Minimize Risk With Your Commercial Real Estate Loan In Texas

The benefits of a successful real estate investment are many and varied. However, when you venture into property management with a commercial real estate loan, you are invariably taking on a great deal of risk as well. Managing the risks involved, especially in volatile markets like Texas, can greatly enhance your chances for success.

Commercial real estate and the investment in a commercial real estate loan can be very lucrative and rewarding experiences. However, there is a certain level of risk that an investor While commercial property investing can be risky in ways that are unforeseen to the first-time investor, there are ways to minimize the risk. But be warned. There is ALWAYS risk and you should be very wary of anyone who tries to tell you otherwise.

One of the biggest risks to commercial real estate loans and commercial property is the market as a whole. There are so many factors that play in to the success of a real estate market that it is virtually impossible to predict them all, however, a smart investor is going to stay up to speed on a variety of things that will indicate local economic strength. The strength of local businesses and multi-family housing units are a very good indicator of local economic strength and can give excellent insight into the demographic movements of specific areas. This is especially true when it comes to professionals in the leading industries of the region. In Texas specifically, the market can easily be judged based on the movement of professionals hired to work in the energy sector. As that industry goes, so does the majority of the market.

Another massive risk of a commercial property are structural improvements and construction. This might not seem like a risk at first, as many properties require improvements and renovations before they are able to be viable income generating properties, as well as ongoing improvements. Where this becomes a risk, however, is when costs and time are underestimated. This is a very common occurrence and is not something that many investors are equipped to deal with, especially when involving a commercial real estate loan that requires payment. It is safe to assume, with commercial construction, that very little will go according to the proposed timeline and you will have to adjust both your end date and your expectations.

Knowing these risks to my commercial property and commercial real estate loan, what is the best way to prepare myself?

Many of the risks of commercial investments can only be minimized by being properly prepared and well educated about the flows of the market. Those risks that are the largest are completely outside of the control of the investor. While this might be daunting and stressful, it is also incredibly rewarding, as such risks have a tendency to turn away those who are faint of heart. This leaves plenty of opportunities for those who are willing to take on some risk (calculated risk) for plenty of reward. When it comes to commercial real estate loans, nothing is a sure thing, but by educating yourself and protecting your property, you can minimize the lasting impact of an economic downturn.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

Technorati Tags: commercial loans,commercial lending,commercial mortgage

The Fed continues to raise commercial real estate loan rates. What can borrowers and lenders expect?

The Fed has raised interest rates twice so far this year, effectively raising all commercial real estate loan rates. The short term impact is easy to predict. Whether the rate increase is good news or bad news is harder to tell.

The Fed has raised short term interest rates which now range from .75 to 1 percent. Some analysts expect more rate hikes in the immediate future. In the face of these rising interest rates borrowers will likely clamor order to refinance their outstanding mortgages before rates go up any further.

The rate hikes coincide with a “wall of maturities in the CMBS market.” CMBS borrowers will likely need to refinance before the Fed raises rates yet again. However the impact of these rate hikes may be obscure to regular business owners, especially when it comes to property values. Depending on the perspective the rate hikes can be seen as good news, bad news or some combination of both.

On the positive end, higher interest rates could make the commercial real estate market less volatile. Both borrowers and lenders will now have a clear incentive to cut back on any risky lending. Business and property owners may think twice about taking on a new mortgage. Under the higher rates lenders will be far more prudent as to whom they lend money, and banks no doubt will raise borrowing standards. Lenders with lower standards, such as bridge or specialty lenders, will no doubt benefit as a result of the increase. Above all the rate increases by the Fed signal that the US economy is improving and a strong economy is no doubt a net positive for the commercial real state market.

The most obscure impact of rising commercial real estate loan rates is the impact interest rates have on property values.

The historically low interest rates of recent years may have inflated commercial property values. With low interest rates, commercial property owners were able to make more income than they would in a normal economic environment. Commercial property is valued based on its ability to generate income, expressed as a cap rate. A cap rate is the income produced by a property compared to its overall fair market value. The higher interest rates will reduce the income potential of many commercial properties, pushing up cap rates and lowering their overall value. As commercial property values decline loan to value ratios increase. Higher loan to value ratios will make once safe loans appear risky to banks, which may lead to higher down payments or collateral requirements for borrowers.

Higher rates on commercial real estate loans could change financing practices and make capital harder to access.

No doubt borrowers will want to refinance at today’s comparatively low rates. However higher interest rates could also make capital too expensive for some borrowers. Overall this could reduce the sale of commercial real-estate, as some borrowers may not be able to afford mortgages at the new higher interest rates. Banks could see a negative impact as the cost of lending increases. Borrowers may seek smaller loans due to the additional expense of higher interest rates. Some borrowers could simply default unable to keep up with the new higher interest payments on their outstanding mortgages.

It is difficult to predict the impact, positive or negative of the Feds recent rate hikes. Over leveraged land lords could see their property values decline. Lending standards could become stricter and borrowing could become more difficult. The increases are by no means drastic, but they will undoubtedly result in a more conservative lending environment.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

Technorati Tags: commercial loans,commercial lending,commercial mortgage