Securing a CRE loan is essential if you plan on leveraging your assets to grow your portfolio of investment properties. However, securing a commercial loan is vastly different than acquiring a residential loan, since commercial lenders are interested more in the profit potential of the deal than they are in your personal finances.
Here are some tips that will help you navigate the best CRE loan for your next investment property deal.
Tip #1: Do Your Homework
The first step in securing a loan for your income property is to make sure you find the most competitive lenders available. You can do this by contacting other commercial real estate investors, brokers, attorneys, escrow officers, or appraisers.
It may be harder than you think to find a good lender, but hearing the same lender’s name twice will point you in the right direction.
Tip #2: Be Professional
Loan officers aren’t the easiest people to talk with over the phone. The vast majority are paid a low salary that is commission-based. That means for them, time is money. They aren’t interested in wasting on the phone with someone who either doesn’t sound like they know what they’re doing or wastes their time.
This means that loan officers are planning on saying no from the get-go; they use the first 60 seconds on the phone to vet you. Your job as an investor is to use that time to make them interested enough to ask for more. To do so, you need to have an elevator speech prepared that is concise yet gives all the information they need at a glance.
Your elevator speech should include the benefits or opportunities presented by your property, plus the following details:
- Net worth, liquidity, and real estate experience
- Property type
- Proposed loan amount
- Refinance or acquisition
- Net Operating Income
- Loan to Value Ratio (LTV)
- Debt Coverage Ratio (DCR)
Remember to make it quick, but be sure you don’t speak so quickly that your elevator speech sounds rushed or rehearsed. Write out the pertinent details, then practice saying it in the mirror. Once you feel more comfortable, try practicing it in front of other people, particularly investors.
Keep in mind that you won’t need to write a separate elevator speech for each property. The basic format will remain the same; only the details specific to each property will change.
Tip #3: Make Sure The CRE Loan Fits The Property
Don’t make the mistake of choosing a CRE loan simply because you’ve been offered one. Instead, make sure that the loan fits your investment goals for the property.
For example, some loans offer lower down payments but require longer terms. That may be fine if you plan on holding the property, but if your plan is to renovate and sell, then you’ll want a loan with a lower fixed rate and shorter term.
Often buyers tend to focus on one thing – such as interest rates – without considering how the other aspects of the loan offer will impact their investment. Lower interest rates might seem desirable, but if they come with a shorter amortization period, then you might find your profits being siphoned off in order to service the debt.
Talk to your broker and your lender, and make sure you’ve considered all the options and how they impact on your investment goals.
Tip #4: Don’t Forget To Negotiate
Hopefully, you’ve applied to more than one lender for a CRE loan. But what do you do if you have two or more loan quotes to choose from? How do you decide which one to choose?
One common mistake many investors make is in assuming that you have to take what you’re given. In fact, it is entirely possible to get better terms from a lender, if you know how to approach the lender.
Here’s what to do.
Decide on the issue that is the most important to you. Once you’ve done that, go back to the lender and respectfully tell them that you are trying to decide between his proposal and another one and that while you’d like to choose his loan offer, there is one thing that stands in the way. Then bring up your one issue, asking tactfully if there is any way he can get a better deal for you.
This tactic works for several reasons. One, the lenders in your town all know each other well. By framing your request carefully, you get the lenders to compete with each other. If one lender knows he doesn’t have the best quote, he will go back and ask for a better number from his underwriter. And as long as your request is a reasonable one, the lender will try to help, since he is now invested in making sure the loan goes through.
There is one caveat to making this work: you must ask before you sign the loan application, otherwise, you won’t have the power to negotiate a better deal.
Tip #5: Make Sure Your Loan Doesn’t End Up At The Bottom Of The Loan Pile
Each lender is unique in how they underwrite, process, and close loans. It’s easy to resist their requests for more paperwork, especially when you’ve spent the last week or so scrambling to get everything ready for a closing.
However, it’s in your best interest not to argue or question the lender about their way of doing things – you won’t win, and you’ll only create resentment, which isn’t what you want.
Another important thing to remember is to make sure to give all your documents as quickly as possible. By submitting your documents quickly, you make the loan process easier for the lender and ensure everything is done before the appraisal comes in.
This is crucial because if your documentation isn’t in before the appraisal, your loan application will end up at the bottom of the pile – a position that is very difficult to recover from.