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Commercial Real Estate Loan - How Do Commercial Real Estate Loan Rates Compare to Residential Real Estate Loan Rates?

Need a commercial real estate loan right now? You can apply to 750 different commercial real estate lenders in just four minutes for free by clicking here.


The typical commercial real estate loan is much larger than the typical residential real estate loan. The typical commercial real estate loan is around $1.5 million, while the typical home loan is only around $200,000. Therefore commercial real estate loan rates must be lower than residential real estate loan rates, right? After all, the bigger the box of corn flakes that you buy, the cheaper the price per bowl.

Unfortunately a commercial real estate loan is far less liquid than a home loan. Suppose you are a bank with a bunch of home loans on your books. Suddenly there is a run on your bank. No problemo. You simply ship over a bunch of home loan files to Fannie Mae and the sell them at par (or better). Almost instantly you have access to your cash, and your bank can meet the run.

But there is no organized secondary market for the commercial real estate loan. In stark contrast to a residential real estate loan, every commercial real estate loan is different. The property is different. One property could be a strip center, and the other could be a self storage facility. Each property has a different quality of tenant. The strip center could have a AAA-rated chain of bookstores as a tenant, while the ministorage might have a collection of moms and pops as tenants.

But maybe Amazon.com is driving that chain of bookstores out of business. Arguably a collection of small moms and pops is a safer tenant mix. On the other hand, Standard and Poor's will only rate a company's obligations as a AAA-quality investment if the company is very strong financially. Standard and Poor's, however, has occasionally been wrong in the past, so who really knows? Therefore it is the subjective nature of underwriting a commercial real estate loan that makes commercial real estate loans so much less liquid. You cannot reduce a commercial real estate loan to a simple universally-acceptable score.

Obviously, the less liquid the investment, the higher the yield an investor will demand. Therefore commercial real estate loan rates will usually be higher than residential real estate loan rates. If you are comparing an "A" quality commercial real estate loan to an "A" quality residential real estate loan, the commercial real estate loan will usually have an interest rate that is around 50 basis points (one-half percent) higher.

Therefore if Countrywide Financial or Ditech is quoting a conventional, 30 year, residential real estate loan rate of 6.0%, you can expect that the bigger banks and conduits will be quoting institutional quality, commercial real estate loan rates of around 6.50% for a typical 25/10. It's not an exact correlation, but you'll find in practice that this rule of thumb is usually pretty close.

Smaller banks, on smaller, less snazzy commercial deals, will usually be quoting commercial real estate loan rates around 0.875% higher than the conventional, 30 year, residential real estate loan rate (also known as the "prime residential rate"). In this example, when the prime residential rate is 6.0%, you can expect a small bank to quote around 6.875% for a $450,000 loan on a small office building. The term might be a 25/7 or a 25/10. Once again this 0.875% spread over the prime residential rate is not an exact correlation, but it will get you into the noise range.

Hard money commercial real estate loan rates are typically around 3.5% to 4.5% over prime, fixed for the one to five year term. Most hard money commercial real estate loans require only interest-only payments. The typical loan fee today for a hard money commercial real estate loan is around 3 points..


Commercial real estate loans from seven hundred and fifty different commercial lenders can be obtained by completing this short commercial mortgage mini-app. Click here to apply.

 

 


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