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Just the Peaks This newsletter, at a glance
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The category of ‘commercial real estate’ needs its own encyclopedia
Let’s do a quick rundown of some key terms
It’s no secret that commercial real estate is one of the most profitable investments a person can undertake. Similar to residential real estate, CRE property values have the potential to appreciate over time. Best of all, unlike a home you’re living in, commercial buildings can be rented out or used in countless other ways to generate cash.
Today, we’re breaking down some key areas of distinction related to commercial real estate. If you’re looking to invest for the first time, or simply want a refresher on how to secure financing, this is your cheat sheet. Let’s go back to class, but this time, with a focus on cultivating a lucrative wealth-building opportunity.
Value in variety
While leasing a residential property can boost your cash flow via rent checks, other forms of CRE investment take things one step further. As an owner, you can lease out the commercial space for a monthly sum—OR—choose to retain the property and build equity while pursuing your own small or large business.
Here’s a quick summary of five popular property types, which are often marketed as Class A, B or C according to the state of the building and desirability of its location:
- Multifamily – Comprised of 4 or more individual units for private dwelling, a multifamily property usually has shorter lease terms; includes apartment high-rises and complexes, condominiums, mixed-use buildings and more
- Retail – Situated mostly in urban areas, retail properties usually fall between 5,000 and 350,000 square feet and are equipped to accommodate a variety of business types; includes strip malls, shopping centers, restaurants and more
- Industrial – Designed for manufacturing, large-scale storage and similar uses, industrial sites often support distribution (third-party logistics) and are located in areas zoned for industry; includes warehouses, factories, docks and more
- Office – Deemed the ‘most popular’ among all commercial property types, office spaces vary in scope, size and design according to tenants’ specific needs; includes offices with receptions and boardrooms, private suites and more
- Special-purpose – Although not as common as the aforementioned kinds of CRE, some properties lack definition, and thus fall into their own ‘custom’ category; includes places of worship, auto body shops, car washes and more
Commercial real estate is not only complex in its classifications. When it comes to financing, there are also a number of options available to investors, all with their own pros and cons. To help beginners understand the process of obtaining a loan, Fortune Builders breaks things down into 4 easy-to-tackle steps.
Are you looking to enter the market as an independent investor? Or, are you seeking financing on behalf of a partnership, development firm or larger corporation? Whether you’re working alone or expanding a jointly owned business, the bank will want to see a strong track record of credit for all parties involved.
The most important thing to remember is that a commercial mortgage is way different than a residential one. Not only do CRE loans come with higher interest rates; they also lack government backing and are written with shorter terms (roughly 5 to 20 years).
Types of loans available include: Conventional loans, Small Business Administrations (SBA) 7 (a) Loans, Certified Development Company (CDC) / SBA 504 Loans, Commercial Bridge Loans, Conduit Loans, Hard Money Loans, among others.
**Note: Requirements and eligibility criteria vary; investors should speak with their advisors for advantages and disadvantages unique to their investment needs and goals.
As with any investment, risk consideration is critical. In commercial real estate, loan-to-value ratio plays a primary role in the bank’s approval or denial of an application. To calculate LTV, divide the total loan amount by the building’s purchase price (or appraised value). According to Fortune Builders, ratios tend to range from 65% to 85%, with the lower percentages deemed more desirable (and eligible for better interest rates) due to decreased risk.
That is, debt-service coverage ratio. Also known as DSCR, this factor evaluates whether a property can generate the cash flow necessary to ‘service’ the debt itself. Beyond your credit history and LTV ratio, commercial lenders want to see that you have a solid business plan—one that points toward a positive net operating income. If your DSCR comes out to less than 1%, banks have a clear reason to deny the loan.
Our loan originators have literally seen it all. No matter the nature of your investment goals, we provide honest, accurate, informed advice to help shape your decisions and ensure the most profitable outcome possible.
Knowledge is crucial to successful CRE investment. But to reach the peak of your dreams, customized support and guidance is key.
Everest delivers: less stress, more success