Grow Financial Federal Credit Union
May 18, 2022

Commercial Real Estate: Owner-Occupied Loans vs. Investment Loans

Are you a small business owner considering a commercial real estate loan? There are a few key terms and facts you’ll want to know before you get started. We talked with Justin Northcutt, Commercial Loan Officer, to find out more about the two types of commercial real estate loans — owner-occupied and investment. He also talked about the SBA loan program, risk, down payments, and variables between lenders. Let’s look at the types of loans that business owners can use to buy property.

Owner-Occupied vs. Investment

In the lending world, there are two classifications for commercial real estate loans: owner-occupied and investment (otherwise referred to as non-owner-occupied). Which type of loan you’ll need comes down to one primary question: who will be occupying the property?

The answer tells us where the repayment of the loan will be coming from, whether that be revenue generated by your own business operating out of the space or via rental income from a third party leasing the space.

Owner-occupied: Are you purchasing a property for your own business to operate from? Then you can get an owner-occupied loan, as long as your business occupies at least 51% of the space on the property. (That means you can still rent out some of the property to tenants, if you want, just not more than half of the space.) Owner-occupied loans:

  • Typically come with the best rates and terms because they’re seen as less risky by lenders.
  • Have a lower down payment, which means less upfront cash in the deal on the part of the business owner.
  • Are available as traditional loans directly through a lender or as SBA loans under the SBA 504 program. (For more details, read about the SBA 504 Loan.)

Investment: Are you looking for an investment property that you’ll rent out to third-party tenants? Then you’ll need an investment loan (non-owner-occupied loan). Investment loans:

  • Allow business owners to diversify their investment portfolio.
  • Provide the potential for rental income.
  • Open the door to many possibilities in terms of property type and use, from retail to industrial to office.

Commercial Real Estate FAQs

What is risk-based pricing?
When making lending decisions, most lenders use something called risk-based pricing. Essentially, this involves evaluating the potential risk of loss associated with any given deal and determining terms based on that risk. Each situation is different and will be evaluated based on your credit history and other factors.

How much of a down payment will I need?
For owner-occupied loans, a down payment of 15-20% is typical. On investment loans (non-owner-occupied loans), borrowers will usually put 25-30% down.

What are the variables between lenders?
When you’re evaluating different lenders and loan options, think about these variables:

  • Rates: This is going to be the first thing most borrowers think about and for a good reason. The interest rate can have a big impact on the total cost of the loan and can vary widely between lenders.
  • Monthly payment: The amount you’ll pay each month is affected by the amortization schedule, which is the length of time you have to pay back the loan, and the rate.
  • Fees: Some of the common fees lenders may charge are loan origination fees, appraisal and survey fees, and potentially prepayment fees. At Grow, we work to keep fees as low as possible and don’t charge some of the fees that other lenders do, including Intangible Tax, which can save you hundreds to thousands of dollars, depending on the size of your loan.

Need a commercial real estate loan?

Whether you’re ready to purchase your first store location, grow into a new location or add an investment property to your portfolio, we’ve got options for you. Our team of local Commercial Loan Officers understands the needs of small business owners and can help you navigate financing for your business.

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Subject to credit approval.


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