Purchasing commercial real estate is an exceptional method of investment. In addition to strong cash flow and long-term appreciation, an asset of this nature allows landlords to leverage existing equity and upscale their investment down the line. 

While a lucrative venture, buying commercial real estate is no minor expense – particularly in Toronto. For the vast majority of investors, this type of purchase will require working with a lender. 

Commercial real estate differs from the residential domain in a number of ways, including mortgages. For both emerging and established investors, understanding the gradations of commercial loans can assist in the creation of an effective financial roadmap. 

Scouting lucrative investment opportunities in commercial real estate? Click here to access our exclusive listings. 

Classifying Commercial Mortgages 

While they both may be seeking the financial power to purchase a piece of real estate, home buyers and commercial investors are entirely different in the eyes of banks and lenders. Even if you’ve obtained a residential mortgage in the past, you can expect a different process when purchasing a commercial property.  

In Canada, commercial real estate mortgages specifically apply to the purchase of income-generating, multi-unit properties. As the exact specifications of any property, land, or infrastructure can differ, key elements of the mortgage are often tailored to the purchase itself, more so than a residential loan. 

Note: In less common cases, some small-scale rental properties could qualify for a traditional residential mortgage if the value of the property doesn’t exceed $1 million and the purchaser elects to live on-site for a minimum of one year. 

Loan-to-Value Ratio

While the classification of commercial real estate mortgages can be fairly encompassing, key financial parameters will vary based on the type of property itself. For example, a mortgage’s maximum loan-to-value ratio (LTV) will be dictated by (among other factors) the property type, such as industrial, mixed-use, multifamily, etc. While processing your mortgage application, the lender will closely analyze the property you intend to purchase, your business plans, and existing finances and credit before deciding on specific terms of the loan.

Dynamic Interest Rates

Considering that commercial real estate assets often far exceed the cost of a single-family home, lenders will increase their interest costs in order to offset or reduce risk. Once again, interest rates are informed by a myriad of factors unique to the property and investor. Established commercial landlords who have proven successful in their existing ventures may face more-favourable rates compared to those just starting out. 

In addition to elevated interest rates, most lenders will also require a higher down payment for commercial properties (compared to residential) to further mitigate potential risk on their end.

Debt Service Coverage Ratio

One essential calculation involved in a Commercial Real Estate mortgage is the Debt Service Coverage Ratio (DSCR). Comparing the mortgage amount to a property’s income or income potential, lenders will use DSCR to determine your creditworthiness.

At a high level, the DSCR analyzes your net operating income (NOI) over the amount paid towards principal and interest. However, this ratio can be easily miscalculated if not all inputs are factored in. To avoid any mistakes, your commercial real estate agent can help you generate an accurate DSCR.

Seeking finance-focused commercial real estate resources? Explore these articles from our blog. 

Acquisition Timeline  

Because commercial real estate mortgages involve more complex variables, the processing timeline is often notably longer than residential averages. Depending on the type of investment and amount of the loan, the closing process could take anywhere from six weeks to several months. That being said, an experienced commercial real estate agent can provide you with personalized guidance and advice to help expedite this stage. 

Amortization Basics

One of the relatively simple ways that commercial real estate mortgages differ from residential loans is amortization. Speaking generally, the maximum amortization term for a home mortgage in Canada is 25 years. However, as commercial real estate is a larger-scale investment, lenders may offer longer terms and amortization periods. In certain instances, investors could qualify for an amortization period of up to 40 years. Once again, the terms offered by your lender will be dependent on the property itself and your existing financial health.  

Looking to leverage an existing asset to upsize your commercial real estate investment? You may find these pages from our site helpful. 

Start Building Wealth

If you’re looking to make a strategic investment in one of North America’s most competitive commercial markets, you’ll need an expert in your corner. With a finger on the pulse of everything that’s happening in the industry, InTrust’s institutional advisory services lift you above other investors in the city.

In addition to helping you acquire a lucrative investment property, InTrust’s elevated market position can streamline your mortgage process. As part of our exclusive industry networks, we’ll connect you with specialized brokers or lenders to ensure you have the financial muscle needed to acquire a profitable asset.  

Searching for the perfect commercial real estate investment opportunity? Find out how InTrust’s powerhouse advisory services can help you excel. Send me an email or call me at 416.930.3890 to get started. 

Questions About Commercial Real Estate?

See the services we offer to learn how we can help you achieve more with your asset.

Learn More