Last year, an estimated $13 trillion in home equity was available to U.S. homeowners. It has doubled since 2011 and many people are now looking for someplace other than their home to make money from real estate. Investing in commercial properties may result in significant financial benefits. Of course, getting approved for a commercial real estate loan is not always easy, especially if you’re a first time commercial investor. Here are just a few tips to help you qualify for commercial real estate loans.
Understand the Income and Expenses Produced from the Investment
A lender’s first rule is that income repays loans. So if you are buying real estate as an investment, it will likely produce income for you. A banker is going to make sure that the income produced from the property is enough to repay all expenses 1.25X over. Those expenses include the loan repayment, taxes, insurances, potential vacancies, management fees and any other costs associated with the property. The more you understand this before you make an offer on a property, the easier the loan process will be.
You will also hear lender’s speak about your Global Cash Flow coverage ratio. Lender’s will look at income from the property itself, but they will also look at your personal income and personal expenses to make sure that you have enough income to cover all personal expenses. The property coverage and Global Coverage both need to be in excess of 1.25X. If you experience a hardship on one property, they want to make sure you can move cash around to keep all your debt service intact,” writes Joe Fairless on BiggerPockets.
Know Your Net Worth
It shouldn’t come as a surprise that lenders take your overall net worth into consideration when determining whether or not you’re eligible for commercial real estate loans. When calculating or estimating your net worth, determine the difference between your assets and your liabilities. Ideally, your net worth will be equal to or greater than the amount of the loan. However, this isn’t a hard and fast rule. Lenders may make an exception for those with a particularly high income.
Boost Your Credit
As with other types of loans, your credit score matters when it comes to commercial real estate investment loans. Although it’s not the only factor, it’s important to keep your score above 650. Anything below 650 may cause challenges in getting approved.
LTV stands for” loan-to-value” ratios. For instance, if your down payment covers 50% of the property’s value, then your loan will have a low loan-to-value ratio. In general, the higher the LTV, the higher the interest rate you can expect to pay. Keep in mind that commercial real estate loans typically have much shorter re-payment periods than residential mortgages, so think carefully about what interest rate will be acceptable.