Securing a good piece of real estate is essential when you have a business. However, any piece of property that catches your eye is sure to catch the eye of other business owners, making the competition fierce. In order to come out victorious, you must have your financing in order. This means you are ready to secure a commercial real estate loan.
Preparing for financing approval requires knowing what lenders will look at. Keep in mind that a commercial real estate loan is much different than a residential loan. For a commercial loan, the lender considers six different aspects of the property and your finances.
Property Value or Future Property Value
What is the property worth today? What is the property worth after repaired or rented? This is probably the most important factor for lenders in the underwriting process. Lenders will use the lesser of purchase price or property value to determine the loan amount.
Net Operating Income
Does the property have cash flow? Income or projected income from the property after expenses is used to determine the debt service coverage ratio. Net Operating Income divided by 12 months of debt service (mortgage payments). For any long term rental property, lenders like to see a steady stream of money coming in.
Liquidity
Lenders will also check into your cash flow. They want to see that you have money in savings and that even with the down payment on the loan, you will still have money in reserves. In general, try to have 10 to 20 percent of the loan in savings. Lenders will not typically care about your personal income. It is worth noting that debt-to-income ratio is not something lenders care about with this type of loan.
Experience
You should have previous ownership in commercial real estate. Lenders want to know that you have the experience necessary to manage and operate the property once you own it. It is helpful if you have experience or ownership now or in the past in different types of commercial properties. For first time investors, having a property management company, a partner with previous experience, or general contractor involved in the project are ways to get past having no experience.
Credit Score
Your credit score does factor in but probably not as much as you think. Lenders want to know that the borrower pays their bills and does not have any financial crimes or fraud in their background. Lenders focus more on the money you have on hand than on your credit rating. The higher your credit score will help you secure the best interest rate available. However, you need to have at least a 650 score to avoid hassles.
Net Worth
Depending on the type of investment property, lenders may want to see that you have a net worth that is at least equal to the amount of the loan. If yours is greater, then that is even better. Do not count yourself out if it is not up to par, though. It is possible to balance it if you have enough liquidity.
Get these six areas in order before you apply for a commercial real estate loan to help increase your chances of an approval. Going into the meeting with a lender prepared will make you look better and help you get things off on the right foot.
