Real estate properties for rent are a sound investment option for most small businesses. To acquire a commercial rental property, most entrepreneurs seek out capital injection from other investors or get an investment property loan. Prospective financiers include established national banks, online firms, and investor-focused lenders. You can use a commercial mortgage to invest in a mixed-use business building, office building, retail complex, and more. Here’s a brief guide to getting a mortgage for your commercial rental property.
Different Types of Investment Property Loan
As you explore your rental property financing options, here are various types of small business loans to consider:
- Term business loans: If you’re looking to invest in a rental property, you can approach a bank or mortgage lender for this type of real estate financing. For example, a short-term commercial loan could help cover your small business’s day-to-day operations. Consider getting a long-term business loan to renovate an existing building or purchase a new rental property. A bridge loan would be appropriate for immediate business needs.
- Non-conventional loans: You may not always qualify for the standard loans. In that case, you may access capital via alternative lending, such as merchant cash advances.
Requirements for an Investment Property Loan
Generally, lenders have stricter eligibility rules for commercial rental property loans. Qualification requirements include:
A good credit score: Your business score or personal credit score (or both) can boost your eligibility for a rental property mortgage, with some lenders requiring a minimum score of 620. Good credit can also lower your interest rate.
Low debt-to-income (DTI) ratio: Your DTI compares your debt against your gross income. Most lenders will consider you a low-risk borrower if you have a DTI ratio of 36% or less.
Down payment: A higher down payment can lower your interest rate. The requirement varies by lender, with some requiring at least 20% of the loan amount upfront.
FAQs About Investment Property Loans
- What types of loans are available for a commercial rental property?Options include bridge loans, hard-money loans, conventional commercial mortgages, and SBA 7(a) loans from the Small Business Administration.
- What are the commercial mortgage interest rates?Commercial mortgage interest rates vary widely, generally from 5% to 15%.
- What is the rate of down payment for commercial real estate loans?Down payment requirements vary by mortgage provider and borrower’s creditworthiness (typically from 10% to 20%).
- What are the commercial loan term options?Your lender decides the maximum repayment term. For example, SBA 7(a) commercial property loans have a maximum term of 25 years. For CDC/504 loans, the maximum repayment period is 20 years.
The Bottom Line
An investment property loan can provide the funds you need to grow your wealth through real estate. However, each type of commercial loan available has its own benefits and challenges. This is why it’s always a good idea to research your small business financing options and their qualification requirements before applying.
If you prefer a more straightforward prequalification for an investment property loan, contact us at Fidelity Mortgage Lenders today. Our advisors are happy to walk you through our various real estate financing solutions that come with flexible terms.