There are two ways to be successful in commercial real estate — buying on price or buying on terms. If you are one of the lucky investors sitting on a pool of cash, or you have already syndicated your deal and have 100% purchase money available to you, this article is not for you.
If you are more like the majority of commercial real estate investors who want to leverage their dollars and maximize their ROI, they you must buy on terms. Buying on terms means having the minimum “skin in the game” and leveraging your dollars for maximum growth and appreciation. In other words, using debt as part of your strategy to purchase and/or refinance your properties.
There’s an old saying that the only time a bank will lend you money is when you don’t need it. This is partially true. The more well positioned you are as a borrower, the more favorable your loan terms will be.
Here are some tips that will help you get ready to be the best commercial borrower you can be.
Tip #1: Prepare your Personal Financial Profile
Your personal financial profile lets the lender know who they are dealing with and what kind of behavior you tend to exhibit toward money. Your financial profile consists of your Personal Financial Statement (PFS) showing your assets, liabilities and net worth, and current cash flows. Make sure your Personal Financial Statement is up to date.
Your Financial Profile also includes your credit scores. In commercial real estate lending, the borrower is rarely, if ever qualified according to their credit score. There are two reasons for this: 1) commercial real estate loans are almost always made to entities (corporations, LLC’s, etc.) rather than individuals; 2) more importantly, the lender is qualifying the property, not the borrower.
Having said that, a lender will look at a borrower’s personal credit history as a reflection of how that person manages credit and debt. This tells them something about the individual they are electing to do business with. So, if you haven’t looked at your own credit report recently, please pull your own credit report (get one that includes the 3 credit scores) and make sure it is accurate.
Tip #2: Prepare your Borrowing Entity’s Financial Profile
For your entity (the company that is owning the commercial property) the lender will want to know your history of revenue and expenses, especially as to how they relate to the property. Make sure your business tax returns are up to date. Make sure you have profit and loss statements available. Some lenders like to go back 3 years.
Tip #3: “A Picture is Worth 1000 Words!”
Have current photos of your property. Lenders like to see the outside (front and back); the inside (different offices/apartments/ etc.) andthe neighbors. Have digital pictures that help the lender understand the market value of your property. And, pleasedon’t make the files so big that they have to be sent one at a time. Shrink them down. It’s also really helpful to label them with the address of the property and the type of property, if it isn’t obvious from the images.
Tip #4: Know your Numbers!
Lenders are numbers people. They want to understand the reasons why your property can carry the maximum amount of debt you are seeking, expressed as Loan to Value (LTV). They want to understand the amount of income (Net Operating Income or NOI) your property is generating on a consistent basis. Finally they want to know that the income generated by the property can more than support the monthly debt service. Lastly, they want to know that there are cash reserves for unanticipated situations. Get familiar with these terms and you will favorably impress your lender.
Tip #5: Know your Upside!
Lastly, Lenders look to your exit strategy. They want to know what your plan is for repaying the loan balance, when it becomes due, or how you intend to increase the value of the property so you can refinance it in the future. Be clear on your plan. The stronger your plan to increase the value of the property, through property improvements, rent increases, marketing, and other strategies, the more favorable the lender will be toward your loan request
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These are just some of the areas in which Sofia Capital Ventures can help you access the private commercial loan you need for your property. Through our “Concierge” services, we match you with the best lender to fit your borrowing needs and walk you through every step of the commercial loan process. If you are seeking assistance in preparing your lender presentation or are new to commercial real estate investing, please CONTACT US about our Concierge Services. We look forward to working with you.