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Commercial real estate financing is an area filled with confusing terms and math concepts that can be difficult to grasp. Regardless, there are intrinsic differences in commercial financing vs. residential financing. The main difference is that you will be required to demonstrate your property's earning potential. You will need an appraisal from a reputable source which will show your financial lender a realistic view of your earning potential and prove that you are able to meet your obligations after all your other bills are paid. In addition to paying for an appraisal, you will need to consider other documentation needed for your lending institution: Income and expense statements demonstrating solid income potential Financial statements for all owners of the property and the borrowing entity Profiles of your chosen management team Plans, including any necessary construction blueprints, explaining the proposed use of the property
Another important aspect of commercial real estate financing is that banks determine the value of your property somewhat differently. In residential real estate lending, everything depends on the value of your property at the time of the sale. With commercial lending, the value of the property will be based on the following: Anticipated use of the property Expected returns on investment for the property (i.e. its income-earning potential) Geography (location) Type and size of the property Perceived risk to lender & market conditions
Even with the differences in financing requirements, investing in and offering commercial real estate can be a fantastic investment. Commercial tenants are significantly lower-maintenance than their residential counterparts. A business owner is going to call a plumber to fix his leaky faucet because it interferes with his business whereas a residential tenant is going to call you. The downside of this is that a commercial tenant is going to expect extremely fast turnaround when he does call you, because his or her livelihood depends on your prompt response. If you are able to keep your property in top shape initially and respond quickly to repair requests, you will discover that commercial real estate investment may be the right option for you.
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