How can I prepare myself to get a million dollar loan?
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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
9yOriginally posted by @Akash Sky:
Let me preface this by saying one thing: I don't want to get a million dollar loan right now, but I do want to get a million dollar loan the next time the real estate market corrects itself.
That being said, I've decided that when the housing market goes down, I want to invest a million dollars into a commercial real estate property.
I know that right now, there is no way any bank would loan me a million dollars, but what are some of the things that I can do right now to increase my capacity for debt?
Some things I'd like some insight on: importance of credit score, what experience I'll need, type of lenders I should approach, down-payment I should have ready, things I can do to appear less risky to banks, etc.
If there is some sort of massive real estate correction, whatever commercial lending requirements apply today, will not apply at that point in the future. Lending follows the market (bad things happen when lending LEADS the market), and gets conservative when things are down, liberal when things are up.
But, yeah, it'll always be easier to have commercial credit extended to you with solid credit, relevant experience, and a strong down payment. It's just that the bar for "solid," "relevant," and "strong" may be set higher than it is today, as commercial lenders are looking to take less risk when things are trending downward.
29 Replies
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes9y
Originally posted by @Akash Sky:
Let me preface this by saying one thing: I don't want to get a million dollar loan right now, but I do want to get a million dollar loan the next time the real estate market corrects itself.
That being said, I've decided that when the housing market goes down, I want to invest a million dollars into a commercial real estate property.
I know that right now, there is no way any bank would loan me a million dollars, but what are some of the things that I can do right now to increase my capacity for debt?
Some things I'd like some insight on: importance of credit score, what experience I'll need, type of lenders I should approach, down-payment I should have ready, things I can do to appear less risky to banks, etc.
If there is some sort of massive real estate correction, whatever commercial lending requirements apply today, will not apply at that point in the future. Lending follows the market (bad things happen when lending LEADS the market), and gets conservative when things are down, liberal when things are up.
But, yeah, it'll always be easier to have commercial credit extended to you with solid credit, relevant experience, and a strong down payment. It's just that the bar for "solid," "relevant," and "strong" may be set higher than it is today, as commercial lenders are looking to take less risk when things are trending downward.
- Burbank, CA · Member since 2016 · 39 posts · 3 votes9y
Originally posted by @Chris Mason:
Originally posted by @Akash Sky:
Let me preface this by saying one thing: I don't want to get a million dollar loan right now, but I do want to get a million dollar loan the next time the real estate market corrects itself.
That being said, I've decided that when the housing market goes down, I want to invest a million dollars into a commercial real estate property.
I know that right now, there is no way any bank would loan me a million dollars, but what are some of the things that I can do right now to increase my capacity for debt?
Some things I'd like some insight on: importance of credit score, what experience I'll need, type of lenders I should approach, down-payment I should have ready, things I can do to appear less risky to banks, etc.
If there is some sort of massive real estate correction, whatever commercial lending requirements apply today, will not apply at that point in the future. Lending follows the market (bad things happen when lending LEADS the market), and gets conservative when things are down, liberal when things are up.
But, yeah, it'll always be easier to have commercial credit extended to you with solid credit, relevant experience, and a strong down payment. It's just that the bar for "solid," "relevant," and "strong" may be set higher than it is today, as commercial lenders are looking to take less risk when things are trending downward.
Hey Chris,
Thanks for pointing out that standards will tighten up when the markets go downwards (I actually didn't think about this!).
Can you describe to me what a strong loan candidate looks like to you right now (I.e. their credit score, what % down they have, what specific experiences they have)? I figure that I'd just apply a fudge factor and try to make myself as perfect as possible for a loan.
- Investor · Twin Cities, MN · Member since 2009 · 163 posts · 40 votes9yIf you're looking for a property of that size and assuming it might be your first or maybe even second or third property, the bank will probably want 30% down. I'll let other people chime in but I don't think commercial lenders look as much at credit score as the residential market. I would think anything over 700 is good maybe even down to 650 or 620 depending on the reason.
- Investor · Twin Cities, MN · Member since 2009 · 163 posts · 40 votes9yAs far as what to do now, you have to find a geographical market you want to invest in and limit where you're looking at first. Figure out what you would pay for every single property in that area. You can pull information on properties for lease and sale from Loopnet. Look at tax records online if you can. Put together a mailing list of owners for your targeted area. Figure out which broker you want to use and approach them. I would look at the current commercial listings and see if there's someone or a couple that come up multiple times. We're also waiting although office lease rates in some markets still haven't recovered. There still may be some value.
- 9yAlexander FelicePro MemberGuy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
25% down, solid profitable property, good credit ~740+ , previous experience
As others have said above: when the market retracts, banks will likely follow. You may get a property cheaper but lending may be tighter. It's good to prepare early like you are, the more perfect a candidate you are the easier it is to get loans (and be confident when asking for loans).
Find a lender who likes medium sized commercial real estate loans, not all banks have the same goals.
- Burbank, CA · Member since 2016 · 39 posts · 3 votes9y
Originally posted by @Greg V.:
As far as what to do now, you have to find a geographical market you want to invest in and limit where you're looking at first. Figure out what you would pay for every single property in that area. You can pull information on properties for lease and sale from Loopnet. Look at tax records online if you can. Put together a mailing list of owners for your targeted area. Figure out which broker you want to use and approach them. I would look at the current commercial listings and see if there's someone or a couple that come up multiple times.
We're also waiting although office lease rates in some markets still haven't recovered. There still may be some value.
I have not really thought about area too much yet. I'm pretty sure that I will want to purchase something in a no income-tax state (though I'm not too sure if this actually provides a huge advantage). What are some things you look for in an area when planning a major acquisition? Also, after choosing my area, what are some ways I can evaluate / form connections with a good broker?
In terms of finding a lender, do you recommend I simply walk into banks and ask if they like medium sized commercial real estate loans? Do you think I would have better luck with large banks or smaller credit unions?
- 9yAlexander FelicePro MemberGuy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
I can't speak for how all banks lend. My bank loves these types of loans and specifically look for them (in my area). I know other banks have different priorities.
network with people in the industry. Networking is almost always the most productive thing you can do. You find the right people and you'll find your money.
- Burbank, CA · Member since 2016 · 39 posts · 3 votes9y
Originally posted by @Alexander Felice:
I can't speak for how all banks lend. My bank loves these types of loans and specifically look for them (in my area). I know other banks have different priorities.
network with people in the industry. Networking is almost always the most productive thing you can do. You find the right people and you'll find your money.
Do you have any networking tips? (I guess the reason I'm asking is because I'm introverted and networking is going to be a challenge that I must overcome).
- Vendor · New York, NY · Member since 2017 · 217 posts · 88 votes9y
More than anything, you'll have to provide sufficient liquidity to cover debt service for this loan, and a solid asset to ensure the lender some comfort - i.e. stable market, etc.
If you already have a ton of liquidity and excellent evidence to showcase your ability to generate income, getting a loan of that size should not be a problem. A $1M loan at 30Y-fixed at 5.00% will only cost you $5,368.22/month of debt service, so it isn't really a big deal, you can do it!
- Burbank, CA · Member since 2016 · 39 posts · 3 votes9y
Originally posted by @Franco Li:
More than anything, you'll have to provide sufficient liquidity to cover debt service for this loan, and a solid asset to ensure the lender some comfort - i.e. stable market, etc.
If you already have a ton of liquidity and excellent evidence to showcase your ability to generate income, getting a loan of that size should not be a problem. A $1M loan at 30Y-fixed at 5.00% will only cost you $5,368.22/month of debt service, so it isn't really a big deal, you can do it!
Can you explain what liquidity means in more detail? Also, I do not believe that I will be able to comfortably pay for the $1M loan without the income that the commercial property generates. (Of course, I've got plenty of time now to increase my earning potential if that's something that has to be done).
I was mostly planning on purchasing a commercial property when market prices are low and having it pay itself off while generating cash flow. Basically, I wouldn't be able to service the debt on my own in the case some disaster occurred and every single long-term tenant stop paying rent.
- Vendor · New York, NY · Member since 2017 · 217 posts · 88 votes9y
"Basically, I wouldn't be able to service the debt on my own in the case some disaster occurred and every single long-term tenant stop paying rent."
This will effect your liquidity; liquidity meaning you need to (1) have substantial reserves to cover at least 6-months (varies) of debt service and expenses outside of your downpayment, or (2) show you have income to support the debt service despite vacancy. I will note that this also varies given that lenders require different things, but national lenders (not a good idea anyway) will at a minimum ask to see that you have sufficient reserves.
Think from the perspective of a lender, wouldn't it be problematic to lend you money and see the worst-case scenario - i.e you don't have enough income to pay me back, your asset isn't generating revenue to pay me back.
BTW, I don't want you to think this is a dead end. This is why you should form partnerships! Or you should look into these million dollar properties when you have sufficient sources of liquidity! OR just be super creative with your strategy - i.e. buy a place that has the potential to be a million dollars!
- Investor · Milford, CT · Member since 2015 · 200 posts · 69 votes9y
Do smaller deals, become a real estate investor a portfolio lender wants to do business with.
No sane lender is going to give you that kind of money for your first deal. I did dozens with my banker at $250k-$300k before they started funding $1m+ loans.
If your looking to buy during a down turn when no one wants to touch RE with a 10ft pole you had better have strong relationships with your banker and have access to lots of cash to get good deals.
A $1m crash and burn in 2008 say a failing townhouse project, your going to need hundreds of thousands to get in and turn it around.
- Burbank, CA · Member since 2016 · 39 posts · 3 votes9y
Originally posted by @Franco Li:
@Akash Sky
"Basically, I wouldn't be able to service the debt on my own in the case some disaster occurred and every single long-term tenant stop paying rent."
This will effect your liquidity; liquidity meaning you need to (1) have substantial reserves to cover at least 6-months (varies) of debt service and expenses outside of your downpayment, or (2) show you have income to support the debt service despite vacancy. I will note that this also varies given that lenders require different things, but national lenders (not a good idea anyway) will at a minimum ask to see that you have sufficient reserves.
Think from the perspective of a lender, wouldn't it be problematic to lend you money and see the worst-case scenario - i.e you don't have enough income to pay me back, your asset isn't generating revenue to pay me back.
BTW, I don't want you to think this is a dead end. This is why you should form partnerships! Or you should look into these million dollar properties when you have sufficient sources of liquidity! OR just be super creative with your strategy - i.e. buy a place that has the potential to be a million dollars!
To be honest, I think I can easily have the 6 months reserves if the bank would allow me to count my retirement savings. I max out my roth ira + 401K each year. The main issue is that I know that I won't be able to show income (at a 43% debt to income ratio). I think a million dollar loan would require around 14K monthly income.
Also, I certainly don't think this is a dead end! I'm trying to figure out what I can do now to make this happen in the future, (I think I have at least a few years before any correction, but no one knows for sure).
Would experience purchasing a small duplex give myself more credibility when I go to ask for a loan on a large commercial property? The prices for commercial properties are often very large so its hard to get experience on small deals. The only solution to this problem I can think of is to network with commercial real estate investors and perhaps ask them to let me partner at a very small %. What kind of smaller deals should I pursue now in order to build experience to eventually obtain a 1 million dollar loan?
- Investor · Milford, CT · Member since 2015 · 200 posts · 69 votes9y
Start small in the area where you want to go. Turning around a few 2-4 family's would be a good start if you want to do larger ones.
Commercial real estate is huge it's like saying you want to be in computers or law. Ok great which aspect? What area? What niche?
I do aggressive land speculation in affordable housing. I operate in a nich of a nich in the commercial world. I'm looking to get into construction of senior housing next. What I do is vastly different than say someone who buys strip malls, or office space, or NNN deals, etc.
Quite frankly borrowing a million isn't much of a goal in and of itself. What you need to ask yourself is how will you make money with it.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes9y
Bankruptcies = none
Foreclosures = none
Credit score = 700+
DSC = 1.20+
Liquidity = 9-12 months of all debt service coverage (retirement accounts are not liquid)
Net worth >= loan amount
Experience = in the asset class that you are purchasing
These will vary by lender, borrower and property. If you have a big balance sheet and/or experience, the requirements could be less.
- 9yAlexander FelicePro MemberGuy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
Originally posted by @Akash Sky:
Also, I do not believe that I will be able to comfortably pay for the $1M loan without the income that the commercial property generates. (Of course, I've got plenty of time now to increase my earning potential if that's something that has to be done).
This is a must. the property MUST cover the debt service plus expenses plus have profit leftover. Without that no bank will lend on your deal. Your ability to pay for the loan out of personal funds is largely irrelevant as you would not be required to, the property income will be bearing the debt service.
To your earlier point about networking. You get better at networking the same way you get better at anything: practice, education, persistence.
- Burbank, CA · Member since 2016 · 39 posts · 3 votes9y
I want to do a million dollar NNN (triple net lease) deal on a commercial shopping center. I don't know the area right now, but I do know that I'll likely be purchasing in a zero income tax state.
The way I intend to make money doing so is by purchasing a commercial shopping center with a boosted cap rate when the market corrects, thus providing more than enough income to take care of the debt service + hefty profit at the end. I don't know if this is the wrong way to view things, but I essentially want to buy a triple net lease property when its "on sale", and I'm willing to wait as long as that takes. But buying a commercial property isn't like buying an apple at the store, so I'll need to do some preparation to accomplish it.
Thanks for the rough guidelines! (Although Roth IRAs can be liquid depending on what asset you hold since there are no penalties for withdrawing principal)
Does debt to income ratio of the borrower matter for commercial deals?
Alright, guess I've gotta do some grinding!
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes9y
Well said on the Roth.
Many commercial loan agreements will contain DTI covenants but DTI does not have the same bright line in commercial that it does in residential. In commercial, the focus will be more on DSC, the property, experience, liquidity and net worth. Those items will reveal for the lender the ability of the borrower (and property) to have the income to service all debts of the borrower. For some context, some commercial loans are non-recourse; so, the lender is more concerned with the property and the experience of the borrower because they have limited recourse to the borrower's other assets and income sources.
- CA · Member since 2014 · 152 posts · 65 votes9y
Originally posted by @Akash Sky:
Originally posted by @Franco Li:
More than anything, you'll have to provide sufficient liquidity to cover debt service for this loan, and a solid asset to ensure the lender some comfort - i.e. stable market, etc.
If you already have a ton of liquidity and excellent evidence to showcase your ability to generate income, getting a loan of that size should not be a problem. A $1M loan at 30Y-fixed at 5.00% will only cost you $5,368.22/month of debt service, so it isn't really a big deal, you can do it!
Can you explain what liquidity means in more detail?
Liquidity meaning -- you'll need cash on hand, or investments that can be "liquidated" very quickly (e.g. investments in stock market) to cover payments required. Example of non-liquid asset might be like a 12 month CD or something like that (even though you could cash it out w/penalty early if need be), investments in not easily sold real-estate, collectibles, inventory from businesses, etc. may not be considered as highly liquid (easily sold). So basically cash sitting in a checking/savings account would be as liquid as it gets :)
So in example above - "Liquidity ..12 months debt service coverage". If your monthly mortgage/loan payment would be $1000/mo. Then I think bank/lender would want to see $12,000 in liquid funds available before considering you for that loan.
- Burbank, CA · Member since 2016 · 39 posts · 3 votes9y
Of the requirements you listed, I currently satisfy 4 (no bankruptcy, foreclosure, credit score 700+). However, I need to build my liquidity, net-worth, and experience.
In terms of importance, what would you rank them? I basically want to know what I should focus on building up first.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Akash Sky no income state only matters if you live in said state if you don't live in that state its moot.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes9y
During a down turn have access to PRIVATE MONEY. My personal database built over the last 13 years has individuals with a combined net worth in the billions. Not all are passive investors into sponsored deals as some are ones who bought properties directly through me.
Banks will tend to be scared like everyone else during a down turn.
What you need is investors WITH A VISION who do not need cash today and want more equity growth down the road. In a high tax environment those investors prefer taking gains in future years when the tax climate might be better and they pay less on the gains.
To show a lot of cash flow today when they simply do not need it is not advantageous to them.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes9y
I am not a lender; so, I will just give you my opinion. Experience first and then liquidity/net worth next...but they all tend to come together if you are doing transactions. Most investors do not go from 0 to 100 mph...they build. With OPM, you can build quickly but it still requires doing transactions.
- Real Estate Investor · Delafield, WI · Member since 2011 · 57 posts · 15 votes9y
I think you should change your mindset from wanting to get debt to raising equity. Banks will go quiet in the next downturn and by the time they start lending again we skipped way off the bottom. Raise smart equity. Want to talk more about it PM me.
- Burbank, CA · Member since 2016 · 39 posts · 3 votes9y
Originally posted by @Dan Genzel:
I think you should change your mindset from wanting to get debt to raising equity. Banks will go quiet in the next downturn and by the time they start lending again we skipped way off the bottom. Raise smart equity. Want to talk more about it PM me.
Sent a PM!
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