Order of Operations for Commercial Multifamilies

5 Replies

Hows it going BP,

Quick and hopefully easy to answer question here that is tying me up while I try to get my first commercial property. I am confused due to conflicting information on the order of operations of applying for a commercial loan. First I thought it was 1) Open a LLC, 2) Look for properties, 3) Apply for a commercial loan.

Today I talked with an agent and he said I needed to get prequalified first which threw me off because I thought I would have to use the property itself to get qualified for a commercial loan. So his order of operations was: 1) Get prequalified, 2) Find a property, 3) Open a LLC

So I said okay and went to Navy Federal to at least inquire on commercial loans and they said I would have to open a business account first before I can apply for a commercial loan so 1) Open LLC, 2) Apply for Commercial Loans, 3) Look for properties.

Does anyone have the answer or a solid blueprint to follow here?

Originally posted by @Timothy Casallas :

Hows it going BP,

Quick and hopefully easy to answer question here that is tying me up while I try to get my first commercial property. I am confused due to conflicting information on the order of operations of applying for a commercial loan. First I thought it was 1) Open a LLC, 2) Look for properties, 3) Apply for a commercial loan.

Today I talked with an agent and he said I needed to get prequalified first which threw me off because I thought I would have to use the property itself to get qualified for a commercial loan. So his order of operations was: 1) Get prequalified, 2) Find a property, 3) Open a LLC

So I said okay and went to Navy Federal to at least inquire on commercial loans and they said I would have to open a business account first before I can apply for a commercial loan so 1) Open LLC, 2) Apply for Commercial Loans, 3) Look for properties.

Does anyone have the answer or a solid blueprint to follow here?

So, I'll tell you what happened to me when transitioning to commercial Mutli-Family. Was at 12 units (all duplexes and a few townhomes), and decided to transition to commercial MF apartments. Opened new LLC (typically a requirement from the bank, for a commercial deal - they do not want to see other deals in the same LLC for risk purposes), then sought a deal. Agreed upon terms, offer, etc., created PSA, then executed (with enough DD time and extensions to financing if needed - THIS IS IMPORTANT!).

Once I had the executed PSA, I started shopping around for commercial loans, though only really started getting traction once I built a proper, thorough business plan, and had all of my documents ready to send to loan officers. It is critical to have all historic P&L's before most lenders will talk to you. Also, be ready to have an up-to-date PFS for yourself and whomever else is controlling the deal - you must have a higher net worth than the loan amount, and a certain % of liquidity (varies by lender, but 10% is a good start). 

Now, it is important to bake into the PSA a few financing extensions, in case lenders take their time (which is frequently the case). I offered additional earnest monies for each extension, to prove I was serious, which was accepted (asked for 4 extensions, settled at 2). 

Hopefully this helps.


Good luck!

 

@Timothy Casallas I wouldn't apply for a loan if there's no deal for the bank to evaluate. They need to know the specifics of the deal before they qualify it. Considering your purchasing 5+units they will look at the asset and how it's performing before they take a look at your personal financial situation. They want to make sure they revenue being generated can cover the operating expenses as well as service the debt. All commercial lenders are asset based lenders. They look at the individual second.

Line of order:

Get an LLC, Find deals, Submit offers, find debt / equity funding ... in that order

@Timothy Casallas you need an operating company LLC set up first. This is the company that will make offers on properties and handle all up front due diligence, manage the property after closing and receive and cashflows from the profits of the property.

When you get a property under contract, complete the due diligence and decide to move forward to closing you then set up the LLC for the property in the State the property is located in as lenders are going to want the property entity located in the same state as the property.

Once you complete the DD period and set up property LLC you then submit your package to lenders if you do not have a preferred lender to get Term sheets. You then choose a lender and proceed to closing.


Depending on the size of the deals you look at getting Agency non-recrouse loans. You can form the LLC I would just make sure that is a state you want to invest in a lot as not to form an llc and then just discard it. I would get guidance from the bank what is rate, down payment percentage and so forth.

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