For most investors, competitive financing is the biggest driver in achieving cash-on-cash yield, as well as overall investment returns, when acquiring income-producing properties. Understanding and navigating the capital markets is the single biggest challenge to investors seeking to maximize returns while funding the largest piece of the capital stack for property acquisitions.
But it doesn’t have to be. Knowing what to expect beforehand can lessen the burden, and applying early can help you better understand your financial options as well as give you more negotiating power and weight behind any of your offers. While every situation is unique, here are the basics of what you’ll need in order to apply for a commercial mortgage.
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Commercial Mortgages: Let’s Get Personal
While many loans are non-recourse that don’t require personal guarantees, lenders need to know exactly who they’re working with, so it’s up to you to provide not only your personal financial strength as a borrower, but equally important is to highlight your experience as an investor/operator of income-producing assets. Current net worth statements, along with resumes/bios demonstrating track record, are all important to have readily available to keep the process moving forward.
Lenders will ask and verify through background checks and credit scores that you are credit-worthy to borrow the necessary funds when purchasing or refinancing your properties. As many have had difficult times through the last market correction, it will be important to address any “black marks” from your past and whether you’ve handed any assets back to the lender as a result of bankruptcies or foreclosures. It’s important to be up front with any past issues in order to establish trust and credibility with your new lender and avoid having to explain why these issues weren’t disclosed early in the process.
What’s Your Experience?
Illustrating track record and experience is more critical than ever, as lenders want to know they’re dealing with seasoned operators who know how to manage assets. In the case where this is your first such acquisition, it will be critical to add a “deep bench” to your team, whether in-house or third party, in order to demonstrate competency to your skill set and management team.
First time operators/investors may have a tough time convincing lenders that they are reliable and credible in not only modeling operating performance but also in running the day-to-day aspects of owning commercial real estate. At the end of the day, lenders don’t want to foreclose on the property and find themselves in a position where they are forced to asset manage their collateral. They’re in the business of lending, not operating, so it’s vital that you can demonstrate conservative projections that line up with well-known operating metrics of each asset class.
What You’re Worth
Going hand in hand with experience, lenders like to see a borrower’s net worth matching to some extent the value of the property being acquired, along with liquidity of roughly 10% of the loan amount AFTER equity has been invested. Again, while “non-recourse” loans are generally available, the lender wants to know that the borrower has the wherewithal to carry the property out of their own reserves should there be an unexpected dip in income to support operations and debt service.
Many borrowers will team up with multiple principals so that the combined net worth and liquidity match the lender requirements. All too often, borrowers attempt to take on too large of projects because they were able to raise the necessary equity capital, but fell short of lender required balance sheet strength as the key principal or sponsor.
Credit Where Credit is Due
Credit scores have become more relevant to determining a lender’s opinion of the borrower’s credit-worthiness. Lenders will always perform a credit check on anyone who applies for a mortgage, so if you know your credit score is less than 680, do something about it beforehand and work to bring that number up before you apply. To make the process quicker, supply the lender with all of the details pertaining to your credit accounts, which they can then compare to your credit report.
There are many more steps to successfully applying for a mortgage, but this should be a good starting point. Getting property-level information, as well as personal financials, rounded up beforehand will make the process much easier for you and the lender once you do apply. Then you can be on your way to successfully negotiating your property acquisition with confidence!
What’s your experience in getting commercial loans?
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