Burbank, CA · Member since 2016 · 39 posts · 3 votes
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.
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.
Fixed-rate mortgages typically require a 20-25% down payment at least, with a 680 qualifying credit score for a one-unit investment property. You’ll be paying higher interest on an investment loan, due to the higher risk associated with these loans.
You'll need to make sure your Debt To Income (DTI) ratio shows that you can pay off the loan. To work out your total DTI, divide your totally monthly debts by your gross monthly income. The DTI requirements for each lender will be different, but it's advisable to have a DTI under 50% at least, although under 35% is optimal.
Your credit score should be at least 680, but this depends on the deposit you’re putting down and the lender’s requirements. If you need to increase your score, you can make sure to keep your credit utilization at 30% or less of your available credit. It’s also important to make all your payments on time and take your time to build up your credit score.
Many lenders will want to see that you have cash reserves to support yourself for at least 6 months without rental income from the property.
For those who are struggling to get conventional loans, hard money loans are a good option for investment property purchases. They require a lower credit score, are based on the real estate deal itself and have less stringent lending criteria.
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!
Hey Franco, where and how are you securing a 5% loan of this size? Thanks in advance!