If you are new to investing in commercial real estate, you might be wondering just how different the world of financing gets on this side of the fence. While it is true that there are a lot of niche real estate financing products you could consider, there are also some familiar tools that are similar enough to personal loans to be easy to understand. Commercial and residential mortgages do have some differences, though.

Payment Structure, Terms, and Interest Rates

The payment structure for commercial mortgages and residential ones are pretty much the same. Both are typically configured for a monthly payment, and they’re built to amortize across the life of the loan so you have no large payoff costs at the end of the term. That is pretty much the only part of a commercial mortgage that is identical to a residential one.

Terms are still generous to allow for lower overhead while repaying the cost of the loan, but you can expect most lenders to offer choices of 10, 15, or 20 years on a commercial mortgage, as opposed to the residential mortgage’s ability to accommodate 30-year terms. Interest rates are also slightly higher, and the LTVs are lower, which means you will usually need a larger down payment for a commercial real estate loan than you do when buying a home for yourself.

Approvals and Closing Timelines for Commercial Mortgages

Commercial mortgages take slightly longer than their residential counterparts to approve. In many cases with traditional lenders like banks, this is because you are required to submit a business plan as part of the loan deal. This is becoming less necessary when investing in properties, although it is still commonplace when a business is buying space for its own operations. If you are planning on using the new property for income, your business plan should detail its predicted income, why there is demand for this type of space, and how you intend to manage the property.

The approval process for commercial mortgages makes them an inadvisable choice for short-term investments like flipping homes, but the low monthly payments and long terms make them ideal for financing income properties. With the right down payment, you can keep your loan costs low enough that the property pays for itself and its own maintenance, allowing you to realize a return without having to pay off the building first. That’s not typically the case with income properties acquired through cash purchases or deals you finance with short-term loans.