For 2020, the average commercial real estate interest rate on a loan is about 3% to 12%. The actual interest rate you secure on a loan depends on the type of loan you choose, your qualifications as a borrower, and the type of building or project you will be financing.
Commercial Real Estate Interest Rates by Loan Type
Depending on the type of loan you choose, interest rates could be as low as 4%. Government-backed loans, such as Small Business Administration (SBA) or United States Department of Agriculture (USDA) loans, and conventional commercial mortgages will generally offer the most competitive interest rates and the highest loan-to-value (LTV) ratios.
The application process for a traditional commercial real estate loan requires a lot of time and documentation to complete, and prime or near-prime borrowers are most likely to qualify. If you have a lower credit score or less-than-stellar business finances, or the financed property needs renovation, you’ll pay higher interest rates and have to put more money down in order to get a conventional commercial real estate loan. In this situation, you should consider commercial mortgage companies that specialize in subprime lending, or look for bridge, soft or hard money loans.
Commercial Real Estate Interest Rates for Investment Properties
Interest rates on investment property loans can be as low as 2.4%. An investment property loan would allow you to purchase a property to renovate and resell for a profit. However, the loan-to-value ratios on these loans will be lower than owner-occupied commercial real estate loans, meaning that you’ll be required to put more money down. On average, the loan-to-value ratio for these types of loans is between 65% and 75%.
Regional banks, credit unions and commercial mortgage companies are the best options for obtaining an investment property loan. However, banks tightened their credit requirements after the financial crisis of 2009, so you’ll need to be a strong borrower. A FICO Score between 620 and 680 would increase your chances of being approved.
To qualify, you’ll also need a proven track record of managing investment properties, a strong investment pitch and sufficient cash to put as a down payment. A substantial down payment could help you get the most favorable rates and terms. Be prepared to shop around to get the best deal and to negotiate the terms of the loan contract.
Commercial Real Estate Loan Interest Rates for Building an Investment Property
You’ll pay higher interest rates for building rather than purchasing an investment property—rates currently range from 5% to 12%—because constructing a new building is a riskier endeavor than purchasing a finished one, so banks charge higher interest rates to compensate for this risk. However, the loan-to-value ratio on a construction loan is generally higher than on a standard investment property loan, so you don’t have to put as much cash down.
Construction loans, sometimes referred to as interim financing, also have shorter maturities than investment property loans since you’re expected to pay back the loan once the building is complete. Maturities for construction loans typically range from one to three years. Many construction loans are not amortized and thus require interest-only payments with a final balloon payment at the end of the term.
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