Commercial Mortgage Calculator

The Game is Different: Why Commercial Mortgages Aren’t Like Home Loans

If you’ve only ever financed a home, stepping into commercial real estate financing can feel like learning a new language. The rules are different, the stakes are higher, and the math gets significantly more complex. But here’s the thing: once you understand how commercial mortgages work, you unlock access to wealth-building opportunities that residential real estate simply can’t match.

A commercial mortgage isn’t just about buying a building—it’s about financing a business asset that generates income. Lenders don’t care much about your personal salary (though they’ll still check). What they really care about is whether the property itself can generate enough income to cover the debt. This fundamental shift in perspective changes everything.

The Types of Commercial Properties: Each Has Its Own Playbook

Not all commercial real estate is created equal. Each property type comes with distinct characteristics, risk profiles, and financing structures:

Multifamily (5+ Units)

Apartment buildings are often the gateway drug for commercial investors. They’re relatively stable (people always need housing), easier to finance than other commercial types, and offer diversified income streams. A 20-unit building doesn’t collapse if one tenant moves out.

Typical Financing: 75-80% LTV, 20-30 year amortization, DSCR requirement of 1.25-1.35

Office Buildings

These range from single-tenant professional offices to downtown high-rises. The post-COVID office market has been volatile, with many Class B and C properties struggling as remote work persists. Prime Class A space in strong markets still performs well.

Typical Financing: 65-75% LTV, higher rates than multifamily, strong emphasis on tenant quality and lease lengths

Retail/Shopping Centers

From strip malls to regional shopping centers, retail has been under pressure from e-commerce but isn’t dead. Properties anchored by grocery stores or essential services (pharmacies, dollar stores) perform better than fashion-dependent malls.

Typical Financing: 65-75% LTV, heavily dependent on anchor tenant credit quality

Industrial/Warehouse

The star performer of the past decade. E-commerce growth has driven insatiable demand for logistics space. Clean, modern warehouses near major highways or ports are gold.

Typical Financing: 70-80% LTV, often the most favorable terms due to strong market fundamentals

Hotels

High-risk, high-reward. Hotels are operationally intensive and cyclical, but they can generate enormous cash flow in the right markets. Lenders are more conservative here.

Typical Financing: 60-70% LTV, higher rates, often require experienced hotel operators

Down Payments and LTV: More Skin in the Game

Forget 3% down. Forget even 10% down. Commercial mortgages typically require 20-30% down, and in some cases (hotels, special-purpose properties) as much as 40%.

Why? Risk. Residential mortgages are guaranteed by Fannie Mae and Freddie Mac, making them liquid and standardized. Commercial mortgages are usually held by the originating bank or sold to specialized investors. If you default, the bank is stuck with a commercial property that’s much harder to sell than a suburban house.

Let’s run the numbers on a \$2 million multifamily property:

• 25% down: \$500,000 cash required
• Loan amount: \$1,500,000
• LTV: 75%

That \$500,000 doesn’t include closing costs (typically 2-3% of purchase price) or reserves (lenders often require 6-12 months of operating expenses in escrow). So you might need \$600,000-\$650,000 all-in to close.

Interest Rates: Why They’re Higher and How They’re Structured

Commercial mortgage rates run 1.5-3% higher than residential rates. If you can get a 6.5% rate on a house, expect 8-9% on a commercial property. Why?

• Higher risk: Commercial properties are more sensitive to economic cycles
• No government backing: No Fannie/Freddie guarantee
• Illiquidity: Harder to sell the loan
• Property-dependent: If the property fails, the loan fails

Additionally, commercial loans often have different rate structures:

• Fixed-rate for term: Fixed rate for 5-10 years, then balloon payment or refinance
• Variable rate: Tied to SOFR or Prime, adjusts quarterly or annually
• Hybrid: Fixed for 3-5 years, then adjustable

Amortization vs. Loan Term: The Balloon Payment Reality

Here’s where commercial mortgages really diverge from residential: the loan term (when it matures) is often much shorter than the amortization period (how payments are calculated).

A typical structure:

• Loan term: 10 years
• Amortization: 25 years

What this means: Your monthly payments are calculated as if you’re paying off the loan over 25 years, but at year 10, you owe a balloon payment of whatever principal remains.

On a \$1.5 million loan at 8% amortized over 25 years, after 10 years you’ve paid down about \$200,000 in principal. At year 10, you owe roughly \$1.3 million as a lump sum.

This isn’t a trap—it’s intentional. It forces you to either refinance (giving the lender a chance to re-evaluate terms) or sell. It also means your interest rate isn’t locked for 25 years, which would be risky for lenders in a changing rate environment.

Cap Rate: The North Star of Commercial Valuation

The capitalization rate—cap rate for short—is the single most important metric in commercial real estate. It’s calculated as:

Cap Rate = Net Operating Income (NOI) ÷ Purchase Price

Let’s break that down with a real example:

• Purchase price: \$2,000,000
• Gross rental income: \$240,000/year
• Vacancy loss (5%): -\$12,000
• Effective gross income: \$228,000
• Operating expenses: -\$80,000
• Net Operating Income (NOI): \$148,000

Cap Rate = \$148,000 ÷ \$2,000,000 = 7.4%

What does a 7.4% cap rate mean? It tells you that the property, if bought with all cash (no loan), would return 7.4% annually based purely on operations. This is your unlevered return.

Cap rates vary by property type and market:

• Class A multifamily in hot markets: 4-6%
• Class B/C multifamily in secondary markets: 7-10%
• Industrial in prime locations: 5-7%
• Retail (struggling): 8-12%

Higher cap rates aren’t automatically better—they often signal higher risk. A 12% cap rate property might have tenant issues, deferred maintenance, or be in a declining market.

DSCR: The Lender’s Safety Metric

Debt Service Coverage Ratio (DSCR) is how lenders sleep at night. It measures whether the property generates enough income to comfortably cover the mortgage:

DSCR = Net Operating Income ÷ Annual Debt Service

Using our previous example:

• NOI: \$148,000
• Loan amount: \$1,500,000 at 8% over 25-year amortization
• Monthly payment: ~\$11,580
• Annual debt service: \$138,960

DSCR = \$148,000 ÷ \$138,960 = 1.06

Uh oh. A 1.06 DSCR is tight—really tight. Most commercial lenders require a minimum DSCR of 1.25, meaning NOI must be at least 125% of debt service. Some want 1.35 or higher for riskier property types.

A 1.06 DSCR means your NOI covers debt service by only 6%. One bad month, one major repair, one prolonged vacancy, and you’re underwater. This loan wouldn’t get approved, or if it did, you’d pay a punishingly high rate.

To fix this, you’d need to either:

• Put more down (lower loan = lower payment)
• Negotiate a better rate
• Increase rents or reduce expenses
• Walk away and find a better deal

Cash-on-Cash Return: What You Actually Earn

Cap rate is theoretical (all-cash return). DSCR is the lender’s metric. But as an investor, you want to know: What return do I get on the money I actually put in?

That’s cash-on-cash return:

Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested

Let’s calculate it:

• NOI: \$148,000
• Annual debt service: -\$138,960
• Annual cash flow: \$9,040

• Down payment: \$500,000
• Closing costs: \$40,000
• Total cash invested: \$540,000

Cash-on-Cash Return = \$9,040 ÷ \$540,000 = 1.67%

Yikes. You invested \$540,000 to earn \$9,040 per year? That’s awful. You could get 4-5% in a savings account with zero risk.

This deal, as structured, doesn’t work. The cap rate was borderline acceptable (7.4%), but when you layer on debt at 8%, the math collapses. This is why commercial investors obsess over finding properties with strong NOI and negotiating favorable loan terms.

The Recourse vs. Non-Recourse Debate

Unlike residential mortgages where the lender’s only remedy in default is to take the house, commercial loans come in two flavors:

Recourse Loans

If the property fails and is foreclosed, the lender can come after your personal assets—bank accounts, other properties, wages. You’re personally liable for any deficiency.

Typical for: Smaller loans, riskier properties, newer investors

Non-Recourse Loans

The lender’s only remedy is to take the property. Your personal assets are protected (with exceptions for fraud or environmental issues).

Typical for: Large loans ($2M+), stabilized properties, experienced investors

Non-recourse loans are holy grail for sophisticated investors because they limit downside risk. But they’re harder to get, have higher rates, and require strong property performance.

Prepayment Penalties: The Exit Tax

Want to sell your property in year 3 of a 10-year loan? Get ready to pay. Most commercial mortgages have prepayment penalties—sometimes brutal ones.

Common structures:

• Lockout period: Can’t prepay at all for 1-3 years
• Step-down: 5% penalty year 1, 4% year 2, etc.
• Yield maintenance: You must compensate the lender for lost interest if rates have fallen
• Defeasance: You must replace the loan collateral with Treasury bonds

These penalties protect lenders’ returns, but they limit your flexibility. Always factor prepayment penalties into your exit strategy.

Real-World Example: Running the Numbers on a Deal

Let’s put it all together with a realistic scenario:

Property: 24-unit multifamily in a growing secondary market

Purchase Price: \$3,200,000

Down Payment: 25% = \$800,000

Loan Amount: \$2,400,000 at 7.5% interest, 10-year term, 25-year amortization

Income & Expenses:

• Gross rent: \$360,000/year (\$1,250/unit/month average)
• Vacancy (6%): -\$21,600
• Effective gross income: \$338,400
• Operating expenses: -\$135,000 (property tax, insurance, maintenance, management)
• NOI: \$203,400

Loan payment: ~\$17,675/month = \$212,100/year

Analysis:

• Cap Rate: \$203,400 ÷ \$3,200,000 = 6.35% (reasonable for this asset class)
• DSCR: \$203,400 ÷ \$212,100 = 0.96 ❌ (Below 1.0—NOI doesn’t even cover debt!)
• Cash flow: \$203,400 – \$212,100 = -\$8,700/year (negative!)

Verdict: This deal doesn’t work as structured. You’d be losing money every year just to own the property, betting entirely on appreciation. Pass, renegotiate, or restructure.

Making It Work: Strategies for Success

So how do successful investors make commercial real estate profitable?

1. Value-add plays: Buy underperforming properties, renovate units, raise rents, increase NOI
2. Operational improvements: Cut expenses, replace inefficient systems, renegotiate contracts
3. Better financing: Shop multiple lenders, consider creative structures, refinance when rates drop
4. Market timing: Buy in emerging markets before they peak, sell at cycle tops
5. Syndication: Pool money with other investors to access larger, better deals

Final Thoughts: It’s a Business, Not a Home

Commercial real estate investing isn’t for the faint of heart. The capital requirements are high, the math is complex, and the risks are real. But for those who master it, the rewards are substantial—both in cash flow and long-term wealth building.

Use this calculator not just to crunch numbers, but to truly understand whether a deal makes sense. Don’t let excitement or FOMO override the fundamentals. If the DSCR doesn’t work, if the cash-on-cash return is abysmal, if the cap rate suggests you’re overpaying—walk away.

The best deal you’ll ever do is the bad one you didn’t close.