Choosing The Right Commercial Real Estate Mortgage For Your Property

Real Estate

Buying commercial real estate can be a brilliant investment to secure the future of your business. Owning your premises allows you to enjoy greater financial security and stability, and in the long term, assuming property prices increase, it could be a good investment that will give you profit should you come to sell when your company grows and expands.

Investing in commercial property can be expensive and quite complex, and commercial mortgages differ from residential mortgages, so there are some extra questions to consider. You will need to do lots of research before you spend money.

The benefits of buying include:

– Fixed rates, and fixed outgoings: You will have the peace of mind of knowing exactly what your costs will be, month to month, thanks to fixed-rate loans. This will give you stability compared to renting, where you are subject to market rent increases

– Tax advantages: You can get some favorable capital gains treatment through owning – you can deduct mortgage interest and even property taxes in some cases. This is something that is well worth talking to an accountant about.

– More control: Since you own the property, you can control what happens there. There’s no need to worry about renovations, you aren’t restricted when it comes to decorating. The place is yours and you can do whatever you want.

Deciding on a Mortgage

When you’ve found the perfect property, you’ll need to think about what type of mortgage to take out. There are two main choices – floating or fixed rates.  Which makes the most sense for you?

Fixed-Rate Mortgages

Fixed-rate mortgages are good for people who are risk-averse. The analysis of any application should begin there. Fixed-rate mortgages are good for people who want to know exactly what they’re going to be paying during the holding period. They offer stability, and for the duration of the holding period you will not have to worry about what is going on in the economy.  The downside is that the mortgage will start out at a higher rate than a floating rate mortgage, and there may be a yield maintenance clause that means that if you pay off the mortgage early you will have to pay a penalty fee Used Car.

Some mortgages will allow you to add a clause to it which will allow a new buyer to assume the debt, so if you move, you can sell the mortgage to the incoming tenant, which will allow you to avoid any prepayment penalty.

Floating rate mortgages, on the other hand, are a calculated risk. There was a time when people would avoid them because they can seem quite irresponsible on the surface. Borrowers are drawn in with low rates, but the rates will change after an introductory period, then they will change – and there’s always the risk that if interest rates increase, then the mortgage payments can become quite high. Floating rate mortgages are good for businesses that want flexibility, however – because the holder can move or sell a property without having to face prepayment penalties.

The problem with floating rate mortgages is that if your cash flow is tight then you could end up stuck with a property that you cannot pay for. In addition, if you are wanting to stay in a property for a long time, you will need to think about whether you can absorb the cost of rising interest rates. Of course, if interest rates fall then you could save a lot of money with a floating rate mortgage – but who has a crystal ball that can predict the markets with that much accuracy?

High or Low Loan to Value?

Another thing that you need to consider is the loan to value. Some lenders are risk-averse and will not offer a high loan to value, expecting substantial deposits. Some, on the other hand, are willing to consider much bigger loans. It often depends on the value of the property, and the term that you want to borrow for.

If you are investing in rental properties such as apartments, then you might be able to get a loan for 70-80 percent over 30 years. If you’re wanting a construction loan then you might only be able to apply for 60%, over just a couple of years. There are some lenders that will offer bridge loans of up to 90% but will want repayment within one year.

In general, the more money you can put down in deposit, the lower the interest rate will be. The interest rate will also depend on the type of property that you are investing in, too. Things like apartment complexes are generally considered low risk, because you do not need to have 100% occupancy to get the money back. Things like restaurants and hotels are higher risk, because they are such competitive industries.

If you are an established business with a good credit rating then you may be able to do well out of borrowing from a bank, however, banks are tightening their credit requirements, so you will have to be quite a strong borrower to be able to take advantage of commercial loans from them. Credit unions and commercial mortgage companies could be a good option for newer businesses or those with less of a strong borrowing record.

If you are looking to build, rather than purchase, a property, then you should be aware that interest rates start slightly higher, and you will be expected to put a deposit down of at least 15 to 20%. The terms for construction tend to be shorter, at 1-3 years, and you will need to do your due diligence. Construction loans are not usually amortized, so they tend to be interest-only to start with and then have a balloon payment when the term ends.

It is vital that business owners seek advice about the terms of any borrowing that they want to do and do their due diligence regarding any Cincinnati Ohio real estate, because this is a high-risk industry.