If you know what you’ll be doing with your loan, you should be able to easily figure out what kind of commercial real estate loan you need.
After all, you wouldn’t use a commercial construction loan to buy a brand-new practice building, and you won’t want a purchase loan to build a multifamily unit. But since you already know why you need a loan and how you’ll use it (thanks, step one), choosing the right loan type should be a piece of cake.
In most cases, you’ll choose from a few common types of commercial loans.
A purchase loan, as the name suggests, is designed for purchasing property. This type of financing comes in large loan amounts with long repayment terms (up to 20 years). You may also hear it called a mortgage loan.
A construction loan, on the other hand, usually has a shorter loan repayment term (think one to three years). Most people get a construction loan to build their property, then refinance after completing construction.
Then you have refinance loans. You probably already know how refinancing works with personal loans, and it’s pretty similar for commercial real estate. By refinancing, you can often lock in lower rates and lower your monthly payments.
Hard money loans work best for real estate investors who want to flip properties. These loans come with a higher interest rate and shorter terms than other types of loans, and you can only get them from private lenders. But if you intend to flip and sell, these are ideal.
You can also get a couple types of SBA real estate loans: SBA 7(a) loans and SBA 504 loans. Because these are backed by the U.S. Small Business Administration’s SBA loan program, these have low rates that make them a great deal for real estate.
The type of loan you choose will limit your choices for commercial lenders, since most lenders offer only specific types of commercial real estate loans. So if you know what kind of real estate loan you want, step three should feel a lot easier.