Steps towards obtaining a commercial loan

12 Replies

What are the steps for e relative new investor for obtaining commercial loan in the future? What can I do today in order to set good foundations to be able to go after an apartment building in the future, and how long will it take?

The lending environment is always changing with type of loans. What you plan for in the future might not be available down the road. As asset class cycles happen lenders get hot on certain types of property and then cool off to it once it seems overheated.

That's when newer lenders jump in with great terms on inflated properties. Some of the larger lenders I work with have been doing loans for over 50 years. They have a ton of knowledge on cycles and when things turn frothy.

The lenders that say the market will keep going and they keep lending can lose their shirt along with the borrower. Keep credit good and constantly learn while building reserves. 

@Joel Owens I understand what you are saying and I feel it makes sense for the bigger apartment buildings. 40-200 units.

Right now in my mind are buildings which cost 500K-1M. 25 units and less. I feel that even if I came up with 30% and a property with a 9 cap, I wont be able to find financing. Hence my question about what can I do today to get this kind of financing in the future.

Working on getting my first conventional loan I saw, and discussed with loan originators about the qualifications of the applicant. That made me rethink the way for example I do my taxes. I saw that they treated my income properties exactly as they appeared on the schedule C. 

It made me think what is the income of all these investors that are given 10 loans! From from I saw they must make over 120K a year just to meet the debt to income ratio?

I find that commercial bankers are most interested in financing a good solid deal so if you find one they will likely be interested in talking to you regardless of other factors.

But I've found that the two other most important things that help when meeting a new commercial banker are 1) A personal financial statement which is essentially a personal balance sheet listing all of your Assets and Liabilities and totaling to your net worth. 2) Profit/Loss statements on your existing properties for the last couple years to show your track record. Even if it's just a single family home or two it shows some rental experience.

I would also give them copies of your tax returns for the last 2 years.

Wrap this in a package with an executive summary of you and the property opportunity and you're ready to meet with them. 

Originally posted by @Jeff Kehl :

I find that commercial bankers are most interested in financing a good solid deal so if you find one they will likely be interested in talking to you regardless of other factors.

But I've found that the two other most important things that help when meeting a new commercial banker are 1) A personal financial statement which is essentially a personal balance sheet listing all of your Assets and Liabilities and totaling to your net worth. 2) Profit/Loss statements on your existing properties for the last couple years to show your track record. Even if it's just a single family home or two it shows some rental experience.

I would also give them copies of your tax returns for the last 2 years.

Wrap this in a package with an executive summary of you and the property opportunity and you're ready to meet with them. 

 Good advise Jeff! Thank you! 

Is there a way to prequalify before I find the deal in order to be taken seriously by the seller? How will I be able to go after a deal without financing in place? And lastly is there some kind of formula that connects net worth, income, and size of the deal?

Two things, make your offer contingent on financing and just give yourself time to line up the loan. But secondly, you can get together the package I described and use a fictional property with numbers approximating what you're looking for or better yet use a property on the market that you're considering. Then make a few appointments with commercial bankers and show them your financials and what you're considering and they can guide you in what is reasonable.

I don't know the answer to the last question, and I suspect there really is no answer. It all depends on how much they're needing to lend money at the moment and whether your deal looks good to them. That's why you hear people suggest to contact all the commercial lenders around because sometimes 5 will say no but the 6th one says yes. 

They're wanting to make a good solid loan so if you look really bad on paper they are not going to give you $1 million to buy an apartment complex.

Another thing to consider is start smaller with a commercial lender and build up a relationship. I think my first loan with one was around $50k. 

@Pavlos Kasselouris  Don't underestimate the value in putting together a deal package together for lenders just as @Jeff Kehl described in his post...This is very professional and will make it look like you know what your doing, even if you don't (yet).

You are focusing way too much on the financing piece....Sellers of commercial properties understand you are going to finance, and they aren't looking for pre-approvals, you are not buying a house.

You need to focus on finding good deals, if it is a good enough deal someone will finance it.  You need to find deals that a bank can't say no.

The last deal I did, I didn't even have to shop for a lender, the deal was good, the broker already ran it by the local bank, and they said they would do the deal in heartbeat....You find those deals, and the financing will come, probably even have multiple choices.

I have a lot of loans from regional banks.

1. What is your experience in real estate, asset class, servicing debt.

2. Your DSCR on existing portfolio and if you have the cash to pay it.

3. Cash in the bank.

4. The amount of deposits you'd bring to the bank.

What I would do if I were you.  Build a resume.  Build a strong cash flowing portfolio.  Build cash reserves.  Maybe do some joint ventures that can add to your experience.  

Originally posted by @Pavlos Kasselouris :
Originally posted by @Jeff Kehl:

I find that commercial bankers are most interested in financing a good solid deal so if you find one they will likely be interested in talking to you regardless of other factors.

But I've found that the two other most important things that help when meeting a new commercial banker are 1) A personal financial statement which is essentially a personal balance sheet listing all of your Assets and Liabilities and totaling to your net worth. 2) Profit/Loss statements on your existing properties for the last couple years to show your track record. Even if it's just a single family home or two it shows some rental experience.

I would also give them copies of your tax returns for the last 2 years.

Wrap this in a package with an executive summary of you and the property opportunity and you're ready to meet with them. 

 Good advise Jeff! Thank you! 

Is there a way to prequalify before I find the deal in order to be taken seriously by the seller? How will I be able to go after a deal without financing in place? And lastly is there some kind of formula that connects net worth, income, and size of the deal?

You don't pre-qualify for a loan on the commercial side like you can on the residential side. Reason being is that a commercial loan is based on the property's ability to repay the debt, not on your personal income. As such, there is no way for a commercial lender to issue a pre-approval based on hypothetical figures. They need the financials of a subject property to conduct their analysis.

As someone who focuses almost exclusively on funding multifamily loans I can offer you some advise based on many years of working with borrowers of all types.

As previously mentioned, get your PFS in order and keep it up to date. Lenders generally like to see 6-12 months worth of Principal and Interest (PI) post-closing liquidity..at a minimum. The more liquidity (cash, stocks, bonds), not 401K as that is discounted, you have the better as that mitigates risk, and since you'll almost certainly be obtaining a recourse loan your guarantee needs to mean something and that is based on the amount of liquid funds you bring to the table.

Find a property that is "safe". I see newcomers to the multifamily space all the time who want to get into rehab/value add opportunities with no real multifamily ownership experience. No commercial lender wants to be your guinea pig on a property that needs work and/or a new management style. The less experience you have the safer the asset needs to be. That, and you should align yourself with a reputable property management company who can help you make sound management decisions.

You should focus on buying a property that can demonstrate solid historical financials, isn't in need of significant CAPEX, and is in a decent market. There may still be some financial upside to be had from making improvements and upgrades, cutting costs, and increasing rents, but I rarely see anyone obtain financing (outside of hard money) if they are looking to hit a financial home run by buying under performing properties AND obtain conventional financing on them.

Lastly, while it is possible to finance large(r) loans as a "newbie", I suggest doing your homework on lenders the larger the loan becomes. Banks have their place, but they're not without their shortcomings. Getting the best terms on a small(er) loan isn't nearly as critical once you start getting upwards of 1MM. 

Shopping for the highest LTV is important, but so is getting the best amortization you can. A loan with a 20 year amortization can drastically impact your numbers compared to a loan with a 30 year amortization.

@Darryl Dahlen thank you for your great advise! Is there any way and should get an LLC mixed in the equation of every thing you mentioned? I have setup an LLC with business banks accounts etc, but I havent got a credit card yet to start building credit for the company. Should I, or like you said, the deal is the main thing?

Originally posted by @Pavlos Kasselouris :

@Darryl Dahlen thank you for your great advise! Is there any way and should get an LLC mixed in the equation of every thing you mentioned? I have setup an LLC with business banks accounts etc, but I havent got a credit card yet to start building credit for the company. Should I, or like you said, the deal is the main thing?

You can set up an LLC at any point just to have it ready to go. It's almost a guarantee that the lender is going to require that it be a SPE so having it established isn't going to hurt you.

At your level, you, and any other guarantors, will be the ones underwritten on the guarantor side of the loan since you will almost certainly be looking at a recourse loan. As such, it will be your credit, income, and assets will be what are scrutinized, not your LLC's, and the rule of of thumb is that anyone with an ownership stake of >20% will need to sign on the loan.

Darryl, i am a commercial broker and would like to help you with your questions.  A banker would be a good starting option.  If that does not work out there are other options i can help you evaluate.

IF you want to find out more on your options reach out to me.