Unlike residential financing, commercial financing is dependent upon the stability of the property itself. Two metrics are used to evaluate a property, net operating income, which must be around 1.15 – 1.25 times the loan payment, and the total loan to value, which should be under 80%.
As long as these two factors are met, and the investor has a good financial history without bankruptcies or foreclosures, then getting a loan shouldn’t be a problem.
Sources Of Financing:
1. Portfolio Lenders
Fannie Mae and Freddie Mac are well-known sources of real estate financing, and as government-sponsored enterprises, are responsible for a large portion of lending in the commercial real estate field. Privately, Chase and Wells Fargo are also very active in financing for investment properties.
2. CBMS Lenders
Another important source of commercial and multi-family financing are CBMS (Commercial Mortgage Backed Security) lenders. Although these were involved in the failed loans of the early 2000’s, they are still a source of liquidity for commercial financing.
3. Federal Credit Unions
A source of financing many investors don’t often consider are Federal Credit Unions. These are often an excellent choice of financing for the right investor since they have 30-year amortizations, zero pre-payment penalties, and low loan origination fees. Plus, investors can apply for a loan no matter where they are in the U.S. LTV for credit unions can be as high as 75%.
4. Life Insurance Companies
Life insurance companies might seem like a surprising source of financing for commercial real estate, but they are actually responsible for as much of 10%-20% of loans.
This actually makes sense when you consider the responsibility life insurance companies have to their policyholders. They need to get a steady return from long-term assets in order to pay the returns out on policies. Mortgages for commercial real estate properties provide an excellent source of capital for a fixed period of time.
Loans provided by life insurance companies are generally low interest, with no global underwriting. At times they are particular about the asset they provide a loan on, and usually, prefer low leverage loans of 65% loan to value or lower.
5. SBA loans
The U.S. Small Business Administration might be a feasible source of financing if your business is worth less than $15 million and has a net income of less than $5 million. SBA loans are either 10 or 20 years
6. Construction loans
For some markets getting construction loans are easier if the project is a “build to suit” rather than a spec development.
You’ll still need to prove that there is demand in the area for the building, and for multi-families, that vacancy rates are low, and rents are stable or rising. Lenders also want to see that you have a successful history in commercial real estate and that you’re working with an experienced team of professionals.
7. Hard Money Lenders
Hard money loans are short-term loans provided by private lenders and secured by real estate. Loans are generally from 1- 5 years with monthly payments of interest or interest and a portion of the principal with a balloon payment when the loan comes due.
Similar to commercial loans from banks or credit unions, private lenders look at the equity of the deal more than the investor’s credit history.
Generally, hard money loans include both an interest rate and points; each point is equal to 1% of the amount of the loan. Interest rates range from 10% to 18%, and points can range from 1-10 depending on the how strong the deal is and the lender. Many hard money lenders will lend up to 75% LTV, and a small portion will lend based on the ARV value (after repair value), although this is riskier from the lender’s side since this increases the amount the lender must put into the deal.
Hard money loans are an excellent choice for lenders with credit issues, land loans, construction loans, and when an investor needs to close a deal quickly. In many cases, deals can be closed within a week.
As an investor, you can combine one or more of the above loans in order to fund your next commercial real estate investment. There is no such thing as getting 100% funding for a commercial loan from one lender since you will be expected to put a percentage down of the purchase price.
However many investors have managed to fund nearly the entire purchase price of a property through a creative combination of bank and hard money loans.
Whether you’re a new or experienced investor, don’t throw away a deal because of lack of financing: if the deal is truly as good as you think, finding financing will be much easier than you realize.
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