Commercial property is an attractive investment opportunity in the Boston area. Interest rates and property values are holding steady in the greater Boston area prompting investors to consider one of the several commercial properties on the market. Purchasing commercial property is a bit different than purchasing a residential home, and first time commercial borrowers may need to think about the differences from a home mortgage. Lenders have more stringent requirement because commercial properties are so costly. Buyers must have excellent to good credit, put more money down, and be able to show the property will make enough money to stay current on the mortgage payments.
image by wikipedia
Down payments for commercial loans are higher. If the housing market is strong, buyers may be able to negotiate a zero down home loan. Commercial loans do not have that option, and a typical down payment is between 20 to 30 percent. For a duplex on Barry Street in Boston which lists for $149,000,a commercial loan could require as much as $44,700 with 30 percent down. A similar listing for a single family detached home may require only $14,900 which is 10 percent down. .
Lenders look at the Debt Cover Ratio (DCR) for commercial mortgages. For residential mortgages lenders look at the buyer’s debt to income ratio. Ideally debt should tie up only 45 percent of the buyer’s income with 28 percent going toward a mortgage. For a commercial loan, the formula is based on how much money the property can make. Lenders compare the amount of the mortgage to the amount of money the property has the potential to bring in, as well as how much the property is bringing in at the time of the loan. If a property brings in as much as it pays out for the mortgage the DCR is 1:1. Lenders want commercial properties to have a higher DCR (ideally up to 1:4). This shows the lender the property generates enough income to pay the mortgage and reduces the risk for lenders.
Commercial loans are for a much shorter time than residential home loans. While a 30 to 20 year mortgage for a home is typical, commercial loans are usually structured to be paid off within 10 years. This is another way for lenders to reduce the risk on commercial loans. Another reason for a short mortgage is many commercial properties are sold before the 10 year mark is reached. A residential loan may offer pay off benefits, but many commercial loans do not include this option. Some lenders may even penalize mortgage holders for paying off their commercial loans early.
Buyers are encouraged to look for solid rates. No matter what type of loan a buyer is looking for, commercial or residential, it is in their best interest to consult with your lender for the best rates. Interest rates in the Boston area are lower compared to last year, and property values have remained steady and in some Boston neighborhoods values have actually dropped. While the market is still beneficial to buyers, a commercial property may be a wise investment if the buyer has the credit, down payment to apply toward a loan, and the DCR is high enough.
The differences between commercial loans and a home mortgage are differences not in principle but still necessary to consider, before you take out your first commercial mortgage.