Mortgages & Creative Financing

How to Get a Commercial Loan in 7 Simple Steps

Expertise: Landlording & Rental Properties, Real Estate Investing Basics, Flipping Houses, Business Management, Personal Development, Mortgages & Creative Financing, Real Estate News & Commentary
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Commercial loans are often a major funding source for many real estate investors. These types of loans can really help your real estate business develop and grow.

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Newer real estate investors may not be completely familiar with commercial loans or how to acquire them. In this post, I want to briefly describe what a commercial loan is, why they are important for investors to use, and how to go about acquiring them.

What Is the Difference Between Conventional vs. Commercial Loans?

Conventional loans are the more ordinary, everyday types of loans that one applies for when purchasing a personal residence. A conventional loan is the traditional home mortgage. They can be acquired at almost any bank or credit union or through a mortgage broker.

However, the bank, credit union, or broker that originates a loan of this type does not hold on to them. That is, they do not keep them and collect the interest and payments. Instead, they sell them to the secondary loan market to large institutions, such as Freddie Mae or Fannie Mac.

Commercial loans, on the other hand—while still likely originating from a bank or credit union—are not sold. They are instead held in the bank or credit union's loan portfolio. They are, in a sense, their bread and butter. These institutions make much of their money from the interest and fees these commercial loans bring in.

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Why Real Estate Investors Use Commercial Loans

Conventional loans can get a real estate investor’s career started, but they will not take them to the next level. The reasons for this are the qualifications secondary buyers put in place to acquire these loans.

Conventional loans, for example, cannot be used for a commercial building. A borrower also cannot have more than a few conventional loans in their name. Plus, it is unlikely you can get a conventional loan through your business or LLC.

Thus, if you want to acquire more than a few properties, if those properties include apartments or other commercial investments, and if you want them titled in your LLC, you are going to have to move toward commercial loans. Conventional loans just will not fit what you want to do.

How to Acquire Commercial Loans

Seeking out commercial loans is therefore a logical step in many real estate investors’ careers. The process of finding and acquiring commercial loans is not overly difficult, but it does take some work and effort on the investor’s part. If you have never sought commercial loans before, here are seven steps to help you.

1. Think About Why You Want the Loan

Think about what it is that you intend to do with the money. Are you a buy and hold investor? Will you flip homes? Both? What are your business plans and goals?

Succinctly outline your business plans and goals in a few paragraphs. Yes, write them down so they can be quickly read by or discussed with a potential lender.

Related: The Simple Strategy to Get Your Loan Approved (Almost) Every Time [With Example!]

2. Get Your Personal Finances in Order

Any potential lender is going to assess the risk in loaning money to you and your business. One way they assess that risk is by examining how you handle your personal finances. If your personal finances are not in the best of shape, take some time now and clean them up.

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3. Complete a Personal Financial Statement

A personal financial statement is an exposé of your financial life, and it will be absolutely necessary. If you have never completed a personal financial statement before, understand that they can be real eye-openers. They can help point you toward areas you might need to clean up or otherwise focus on in your financial life.

You can learn more about personal financial statements here.

4. Get Your Tax Returns Together

Every potential lender will want to see at least the last two years of tax returns. Get those forms (federal and state) together now and make copies. Better yet, scan them to create digital files.

5. Update Your Resume and References

These two items help inform a lender about who you are and the real estate connections you have made. Include any real estate-related experience, jobs, and education you might have. List the references of people who help in your real estate career, such as your attorney or CPA. (Just give these folks a heads up first and make sure they will say something positive.)

6. Put This Info Together in One Place

Part of your job in seeking commercial loans is to make it easy for the lender to say yes. Lenders will want to see the documents I have mentioned above and perhaps more. Put all of the documents together in one place, perhaps on paper in a folder, which you can hand to them. Or maybe even in a Dropbox link you can send to them.

Doing so will help demonstrate to the lender that you are organized, serious, and a good risk to take.

7. Hit the Pavement

Seek out the VP of commercial lending at smaller, community banks. Do not bother with the big boys, such as Bank of America or Suntrust at this stage. Rather, look for three or four local banks and give them a call.

Set up a meeting with the VP to discuss your needs. If you already have a couple of rental properties or have done a flip or two, take the VP to lunch and then go on a tour of your real estate portfolio. Doing so will help establish a business rapport and demonstrate your real estate product and ability to repay.

Related: 3 Tips for Getting Approved for a Commercial Loan (& 3 Types of Commercial Lenders—Explained)

Keep the Doors Open

Hopefully, after completing these steps the VP will extend an offer to do business with you through a line of credit or some other loan product. But if they say no, do not fret over it too much. It may not necessarily be you. It could instead be the position the bank is currently in as far as their loan portfolio composition and their own business goals.

But do ask why, as most folks can and will offer helpful advice.

If you get a no, keep looking and asking. If you have done the homework that I have outlined above, most likely someone will say yes. It is what they are in business to do.

Let me finish with a word of caution: Never burn a bridge or become angry because you have been told no. Bankers change jobs quite frequently in my experience. When they do, they might be in a position to help you and may actually reach out to you in the future.

Keep those doors open by always remaining professional.

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Do you have a question or a comment about commercial loans?

I’m always happy to help if I can. Reach out in the comment section below!

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

    Alex Craig Real Estate Professional from Memphis, TN
    Replied 27 days ago
    I’ll try to update my personal financial statement quarterly. Regardless of how many loans I have with one bank they always ask for this. If you’re running QuickBooks then it’s just a matter of downloading your balance sheet
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 24 days ago
    Hey Alex, You are a smart guy to do so. Banks will ask for the statement when you first meet with them and then at least on a yearly basis after that if you do business with them. We try to regularly send an updated statement, along with copies of our tax returns, every year. As you say it does not matter how many loans you have with a bank, they will always need to update their files. Quickbooks or a program like Appfolio does make things easier, but that first time you have to fill one out can be quite a work session. Thanks for reading and for commenting. I hope things are going well. Come see me at MIG next month. Kevin
    Kris Patel Investor from Arroyo Grande, California
    Replied 27 days ago
    I got CTL Credit Tenant Lease loan. Loan is based more on credit of tenant such as Walgreen’s than my credit, so was easy. Plus in 2010 they were giving 1.05 times purchase price for loan too!! Thanks
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 24 days ago
    Kris, Thanks for reading and commenting. You are correct in stating that some commercial loans are based on the specific property and tenant. The bank will look at a triple-net lease held by a tenant like Walgreens and make a loan based on that income. A newer investor may not be ready for such a deal yet however and may be looking for a general line of credit to move up their investing business and flip more houses or buy more holds. In that case the bank is going to take a look at you personally. Good point to make however about the nature of some commercial loans. Thanks for taking the time to do so, Kevin
    Grant Bennett Lender from Tulsa, OK
    Replied 25 days ago
    Another option for commercial loans are insurance companies. They often times won’t go as high on LTV as banks, but the rates and terms can be more competitive. The company I work with recently offered 3.6% rates at 65-70% loan to value. Perfect for someone who doesn’t necessarily need max leverage.
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 24 days ago
    Grant, Good thought. Thanks for sharing it. Kevin
    Dan Haizlip Rental Property Investor from Delaware, OH
    Replied 24 days ago
    I'd like to point out one thing not mentioned in the article. Coming from the world of only dealing with residential loans, it was a shock when I finally decided to move up to more than 4 unit buildings and found out the loan terms (length, amortization, etc.) were completely different for commercial. These things must be taken into account when doing your initial cost calculations.
    Genna Golden Rental Property Investor from Portland, OR
    Replied 23 days ago
    Worth mentioning that because a commercial loan is usually based on building performance, rather than personal financials, the building usually needs to be 80-100% leased. A credit union loan will usually not cover any rehab funds.
    Yazid Shahid
    Replied 22 days ago
    Whats the odds of someone who's a first time investor getting a loan ...????