Logistics of Getting a Commercial Loan as First Ever Loan

6 Replies

I am really interested in the idea of purchasing a multi-family property, likely in the Chicago area. 

I have found many properties in the 250,000-500,000 price range. 

As a commercial loan, my guess is that I have to get it at a bank, with 25% down for a 75% LTV.

At that point, I'm lost! Could someone walk me through the next steps from when I walk into the bank to get this loan, and when I take possession of the property?

Are you going to live in one unit and rent out the other 3??

If you are going FHA to owner occupy probably lot's of lenders. If you are going strictly an investor loan then local to regional banks and credit unions might want to fund a smaller property like that.

How long you are wanting to hold the property comes into play. If you have no luck with a bank located where the property is then your local bank where you live and hold deposits might do the deal as they have an existing relationship with you. 

@Joel Owens Thank you very much for your response and help! I think FHA is an interesting idea and something I would strongly consider for an owner occupied property. However, I am actually looking for a property with ~10 units that I would not live in any of the units that would be a buy and hold for a period of longer than 7 years at least.

Sean - when you say "commercial loan" what you really mean is a portfolio loan - a loan that will not be sold on the secondary market. These products are much more "relationship-based" products than your typical fannie/freddie type thing. Since the bank will hold the paper on the books, and actually make returns for its' investors this way, they need to be sure that the loans they do are "good" - meaning, they want to "know" you a lot more than someone just writing the paper and flipping it on the secondary market within a week.

The notion that smaller banks will rely on this note to generate returns for their investors also tees up a lot of the terms of lending. Shorter AMs, higher interest rates, balloons, ARMs, pre-pays, and all the rest of it. 

It sorta worries me that you are looking at this for your first run...

The better commercial loans are generally in the millions in loan value to start and are non-banks.

In that range say you land 10 units at 50,000 a unit for 500,000 those are generally mid-range tenants that require more work to the asset and collecting rents. Also the loan is with a local bank generally and they want full recourse against you so you have to be very careful on the purchase.

They will want to see after your down payment what your remaining liquidity is and total net worth. Might want to get with a commercial real estate broker who focuses on the 10,20 unit type apartments.

The big players do not mess with that stuff. Example a commercial broker selling a 100 unit property isn't interested in helping with a  10 unit. An exception to that is when a sellers say owns 10 buildings and they are selling them all and they vary in size from 10 to 120 units. In that respect the deal size and volume works for the larger transacting broker versus a 10 unit on it's own and nothing else.

It's  a lot of work to educate a new buyer.

I do that for clients but my deals are generally millions to tens of millions. So I get paid six figures in a commission check for my time on a deal instead of looking at 10,000.

Have you visited this area Sean or have just been looking online and reviewing demographics about the area??

Chicago I have heard favors the tenants heavily with land lording laws. It can take awhile to get them out which causes you to lose money with non-performing units. You need to connect with local investor owners there already who knows what to look out for to see if it is something you really want to do.  

I agree with @Joel Owens that if you aren't looking to owner occupy then your best bet is small local/regional bank.  I have used these types of banks for all of my long term financing. 

You definitely want to show that you have put some thought into it when you go to meet someone from the bank.  These guys require more than just a credit score to get a loan so take the time to fill out a personal financial statement and get your last 2-3 years of tax return pulled together (I've never not been asked for these things and it looks good when you can just pull them right out and not have to send them in later).

Also, if you have any prior real estate holdings or deals, put together a summary of those to showcase any experience that you have.  I have even went so far as to putting together an executive summary of my real estate goals/plans and even laid out a prospective deal to highlight exactly what I was looking to do. 

From my experience a high level of professionalism goes a long way with the people in these types of banks so anything you can do in that regard will be a big help.

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