If you have some experience with residential properties, you may have considered getting into commercial real estate next. Real estate is typically a strong investment that appreciates over time and can provide a good return in the long run. Loans for commercial properties, however, typically differ in a few key ways from residential mortgage loans. To be prepared ahead of time and give yourself the best shot at success with your commercial endeavors, check out these three things you should know about commercial mortgage loans.
1. There May Be Penalties for Prepayment
For many residential mortgages, you may be able to pay the loan off early with no penalties imposed, saving you money in the long run. Commercial mortgages, on the other hand, often come with prepayment penalties attached. This means that if you want to pay the loan off early, you’ll be required to pay an extra percentage on top of the outstanding amount. If you’re considering a commercial loan, it may be best to choose one that you can continue to pay off through maturity.
2. Commercial Loans Don’t Involve Pre-Approvals
When you’re looking to buy a house, it’s often a good idea to get pre-approved for a certain mortgage amount to show sellers you’re a serious buyer. In commercial mortgage situations, however, there’s no pre-approval, but rather a term sheet, which lays out the conditions of the investment. You may want to err on the conservative side about the loan amount you can secure for a property.
3. Recourse Loans May Increase Your Liabilities
In a typical bank mortgage for a residential property, not making your payments on time can lead to foreclosure, where you lose your home equity and the bank takes your house. In commercial mortgages, however, there may be even more liabilities involved if you get a recourse loan. Recourse means you’ll personally be liable for paying back the loan. If your lender seizes your property but there’s still an outstanding debt, they can get it back through other assets of yours. There are different types of commercial loans available, from full recourse to limited recourse to non-recourse, so be sure to read up on the fine print before signing.
When you’ve built up some experience with residential properties and getting into commercial real estate seems like the logical next step, early preparation can help save you a headache later on. Now that you know about some of the main differences between commercial and residential mortgage loans, you can start your commercial property ventures with confidence.