Key Points
- Commercial vs. Residential Loans: Commercial real estate loans have shorter terms, higher down payments, and require lenders to evaluate property income potential and business financials.
- What Lenders Look For: Lenders want strong credit, tax returns, financial statements, and a clear plan for how the property will be used.
- Owner-Occupied vs. Investment Property: How the property will be used can affect loan terms and down payment requirements.
- The 2% Rule Explained: A property's monthly rental income should equal at least 2% of the purchase price — though this doesn't account for taxes, insurance, or other costs.
- Down Payment Requirements: Commercial loans typically require 15% to 30% down, depending on property type, credit profile, and business financial strength.
If you’re a business owner or investor (or contemplating becoming one), then buying commercial property may be on your radar. Whether you’re buying office space for your own company, a retail storefront, or an income-producing property, you will first need to understand how the financing works.
Commercial real estate loans differ from residential mortgages. They typically have shorter terms and higher down payment requirements, and lenders will need to closely evaluate the property’s income potential, your business financials and credit history, as well as the overall loan risk.
Basics of Funding a Commercial Property
Before getting started, lenders will want to see strong personal and business credit, recent tax returns, financial statements, and a clear explanation of how the property will be used.
You’ll also need to determine whether the property will be owner-occupied or purely an investment. The distinction between these two can affect your loan terms and down payment requirements.
Once you submit an application for commercial financing, the lender reviews the financials, orders an appraisal, and assesses the property’s ability to generate income.
What is the 2% Rule in Commercial Real Estate?
The 2% rule is a quick screening tool some investors use to evaluate rental property deals. The rule suggests that a property’s monthly rental income should be at least 2% of the purchase price.
For example, if you’re considering a rental property priced at $500,000, the 2% rule would suggest it should generate about $10,000 per month in rent.
Keep in mind this is rough math only, and doesn’t take into account property taxes, insurance, maintenance, vacancies, or financing costs.
How much will I need for a Down Payment on a Commercial Loan?
Commercial real estate loans typically require larger down payments compared to residential mortgages. Most lenders expect anywhere from 15% to 30% down, depending on the property type, your credit profile, financial strength of your business, and other factors.
If you’re interested in funding for a commercial property, either as a business owner or investor, then talk to one of our commercial lending experts today.
