Tips for Negotiating Great Terms on Commercial Real Estate Mortgages
If you’re thinking about moving into the commercial real estate space as a way to create a passive side stream of income and diversify your investment portfolio, you may be excited about your business prospects but uncertain about securing a mortgage with good terms. Commercial mortgages work a bit differently from residential ones, and usually require shorter term periods and an assessment of the property value first. However, if you’re starting to look for the right property, you can prepare to negotiate the best possible terms for your upcoming mortgage. Here are a few top tips to keep in mind.
Improve Your Application
Because lenders are more likely to give great terms to the best applicants, spend some time improving your metrics before applying for a mortgage loan. Most buyers will need at least a 680 credit score to qualify, but the higher your credit score can get, the better your rates are likely to be. Additionally, if you’ve filed for bankruptcy in the past or have had a property foreclosed on, you’ll need to spend some time repairing your score or explaining what happened. You should also have a cash down payment on hand of at least 10% of the purchase price, and make sure your business is at least three years old and has a decent debt-service coverage ratio.
Choose Your Type of Financing
The next step in getting the right mortgage for you is deciding which type of financing you’re looking for, and negotiating with your lender to reach a compromise. For example, you’ll want to take into consideration whether your mortgage rate is fixed or adjustable, since adjustable rates can go up over time and end up costing you significantly more money than a fixed rate. You’ll also want to consider whether you need a short-term or long-term loan. Talk to your lender to see if term lengths can be adjusted.
Use Your Intended Property As Leverage
Finally, you can use the metrics of your intended property as leverage for better rates. For example, if your property has a strong rental history and proven income, you may be able to negotiate for a better mortgage, since it’s likely you’ll be able to create another stream of income from it. Property value and loan-to-value ratios can also come into play here.
Purchasing commercial real estate is typically a strong investment that appreciates over time. If you’re getting ready to purchase a commercial property, keep these tips in mind and you’re sure to be on your way to good mortgage terms for your commercial venture.