Compare Small Business Loans
For 2020, the average interest rate on a commercial real estate loan is about 3% to 12%. The actual interest rate you secure on a loan depends on the type of loan you choose, your qualifications as a borrower, and the type of building or project you’re financing. To help you compare rates, we reviewed over a dozen types of loans and properties to compile the average interest rates for commercial mortgages.
Average Commercial Real Estate Loan Rates by Loan Type
Depending on the type of loan you choose, interest rates could be as low as 4%. Government-backed loans, such as Small Business Administration (SBA) or United States Department of Agriculture (USDA) loans, and conventional commercial mortgages will generally offer the most competitive interest rates and the highest loan-to-value (LTV) ratios.
|Loan||Average Rates||Avg. LTV Ratio||Typical Loan Size||Typical Max. Term|
|SBA 504 Loan||3.55% - 3.64%||90%||$750,000||25 years|
|SBA 7(a) Loan||4% - 7%||85%||$750,000||20 years|
|USDA Business & Industry Loan||5% - 8%||80%||$200,000||30 years|
|Traditional Bank Loan||5% - 9%||80%||$1 million||12 months|
|Construction Loan||5.72% - 9.72%||75%||$1 million||36 months|
|Conduit (CMBS) Loan||3.16% - 4.74%||75%||$2 million||10 years|
|Insurance Loan (incl. Life)||3.02% - 4.74%||70%||$5 million||30 years|
|FHA Hospital/Senior Care Loan||3.14% - 3.54%||80% - 83%||$3-5 million||40 years|
|Fannie Mae Apartment Loan||3.59% - 4.84%||55% - 80%||$750,000||30 years|
|Freddie Mac Apartment Loan||3.91% - 4.05%||80%||$5 million||10 years|
|Bridge Loan||5.72% - 11.72%||80%||$1 million||36 months|
|Soft Money Loan||6.50% - 17.50%||60% - 65%||$150,000||8 years|
|Hard Money Loan||10% - 18%||60% - 80%||$150,000||12 months|
The application process for a traditional commercial real estate loan requires a lot of time and documentation to complete, and prime or near-prime borrowers are most likely to qualify. If you have a lower credit score or less-than-stellar business finances, or the financed property needs renovation, you'll pay higher interest rates and have to put more money down in order to get a conventional commercial real estate loan. In this situation, you should consider commercial mortgage companies that specialize in subprime lending, or look for bridge, soft or hard money loans.
Average Commercial Real Estate Loan Rates for Investment Properties
Interest rates on investment property loans can be as low as 2.4%. An investment property loan would allow you to purchase a property to renovate and resell for a profit. However, the loan-to-value ratios on these loans will be lower than owner-occupied commercial real estate loans, meaning that you’ll be required to put more money down. On average, the loan-to-value ratio for these types of loans is between 65% and 75%. So, if you purchase a $1 million building, the lender may only give you a loan for $700,000, meaning that you’ll have to put $300,000 down.
|Building Type||Average Rates||Avg. LTV Ratio||Avg. Terms||Avg. Amortization Period|
|Apartment complex||2.47% - 7.53%||73%||20 years||26 years|
|Office building||2.79% - 7.09%||73%||8 years||30 years|
|Retail building||2.73% - 8.61%||71%||6 years||25 years|
|Restaurant||3.93% - 12.67%||66%||7.5 years||22 years|
|Industrial building||2.68% - 7.49%||70%||11 years||25 years|
|Hotel or motel||2.39% - 13.13%||67%||8 years||22 years|
|Golf course||2.39% - 13.53%||67%||9 years||22 years|
|Health care/senior housing||3.03% - 8.61%||71%||14 years||25 years|
|RV, mobile home or camp ground||2,54% - 10.43%||70%||9 years||25 years|
|Self storage||2.85% - 7.61%||70%||6 years||28 years|
|Special purpose buildings||3.44% - 12.63%||67%||8 years||22 years|
Regional banks, credit unions and commercial mortgage companies are the best options for obtaining an investment property loan. However, banks tightened their credit requirements after the financial crisis of 2009, so you’ll need to be a strong borrower. A FICO Score between 620 and 680 would increase your chances of being approved.
To qualify, you’ll also need a proven track record of managing investment properties, a strong investment pitch and sufficient cash to put as a down payment. A substantial down payment could help you get the most favorable rates and terms. Be prepared to shop around to get the best deal and to negotiate the terms of the loan contract. We recommend borrowers consider local banks and mortgage lenders over national ones, as these institutions have a greater interest in investing in local communities.
Average Commercial Real Estate Loan Rates for Building an Investment Property
You’ll pay higher interest rates for building rather than purchasing an investment property—rates currently range from 5% to 12%—because constructing a new building is a riskier endeavor than purchasing a finished one, so banks charge higher interest rates to compensate for this risk. However, the loan-to-value ratio on a construction loan is generally higher than on a standard investment property loan, so you don't have to put as much cash down. Construction loans, sometimes referred to as interim financing, also have shorter maturities than investment property loans since you're expected to pay back the loan once the building is complete. Maturities for construction loans typically range from one to three years. Many constructions loans are not amortized and thus require interest-only payments with a final balloon payment at the end of the term.
|Building Type||Average Rates||Avg. LTV Ratio||Avg. Terms|
|Apartment complex||4.7% - 10.7%||75% - 85%||26 months|
|Office building||5.2% - 10.7%||80% - 85%||18 months|
|Retail building||5.2% - 11.0%||75% - 85%||18 months|
|Restaurant||5.7% - 12.4%||70% - 80%||18 months|
|Industrial building||5.2% - 11.1%||75% - 85%||18 months|
|Hotel or motel||5.5% - 11.3%||75% - 85%||18 months|
|Golf course||5.8% - 11.5%||75% - 80%||18 months|
|Health care/senior housing||5.2% - 11.1%||75% - 80%||18 months|
|RV, mobile home or camp ground||5.2% - 11.1%||75% - 85%||18 months|
|Self storage||5.2% - 11.0%||75% - 85%||18 months|
|Special purpose buildings||5.6% - 12.4%||70% - 75%||18 months|
What to Consider When Shopping for a Commercial Mortgage
Buying or building commercial property is a huge undertaking for your business or for yourself as an investor. You should be prepared to shop around and negotiate to get the best deal possible. We recommend borrowers start with financial institutions with which they already have a good working relationship. If you don’t have a specific financial institution in mind, start with regional and local banks, credit unions, and mortgage lenders since they'll know more about the local market than a national lender.
When it comes to choosing a type of loan, small business owners should consider a government-backed loan program—such as an SBA 504 loan or a USDA Business loan. These loans are easier to qualify for than traditional commercial mortgages, while still carrying competitive interest rates. However, these programs are generally only available to borrowers purchasing or building owner-occupied properties. For investment property loans, a bank or commercial mortgage lender will be the best option. Borrowers whose qualifications are lacking—or who are purchasing properties that need renovation—should consider alternative options, such as a bridge loan or a hard money loan. Keep in mind that you may pay higher interest rates or make a larger down payment for these loans.
When you have a loan offer, make sure to carefully read the contract. Some lenders will require personal guarantees for each owner of the business or require that you pay out of pocket for any building inspections or environmental reports. Contracts may also include certain clauses that could void the entire contract if they're violated. Understand all of the fine print of the contract to make sure you aren’t taking on too much risk as a borrower. Lenders usually expect some back and forth on the offer, so you shouldn’t be afraid to negotiate—especially if you have more than one offer. Review the contract with an attorney or legal advisor, who can help you better understand and negotiate the finer points of the contract.