How To Finance Your First Commercial Property

Video Statistics and Information

Video
Captions Word Cloud
Reddit Comments
Captions
are you struggling to finance your first commercial real estate investment do you want to learn how to build wealth and generate passive income through commercial real estate but the unknowns of the financing side are holding you back yes well I've financed tens of millions of dollars worth of commercial real estate Investments and developments and in this video I am going to guide you through the step-by-step process of successfully financing your first commercial real estate deal so let's get ready to take the first step towards building your real estate Empire step number one assess your financial situation this involves a close look at your Current financial position including your credit score income expenses and overall Financial stability the better you understand your financial situation the easier it will be to determine what financing options are available to you and what terms you can realistically negotiate a good credit score will help you qualify for better financing terms and rates while a poor credit score can limit your financing options and make it very difficult to secure financing in my experience though it hasn't been as important of a determining Factor as your overall financials or how lucrative the deal is but it is important to review your credit report and address address any errors or issues before applying for financing next you'll want to take a look at your income and your expenses so tally up your current income as well as your monthly expenses and any current debt this will help you determine how much you can realistically afford to invest in commercial real estate and what type of financing you'll need to secure then you'll want to dive into your overall Financial stability with your assets your liabilities and your cash reserves lenders will want to know that you have enough cash on hand to cover any unexpected expenses problems with the project or downturns in the market I typically base my numbers off of a 25 down payment so if you have 500 000 in cash you could likely afford a two million dollar property that math isn't always perfect but it will give you a solid idea of what you can likely afford just like the winner will you should also take your experience and expertise in the commercial real estate market into account if you're new to the market you may need to work with a commercial real estate broker or partner with experienced investors to secure financing because lenders prefer to lend to borrowers with experience step number two identify your investment strategy so now it's time to decide the type of property you'd like to buy the investing strategy that you're going to deploy and your goals for your return on investment the different types of commercial real estate you can choose to invest in can have a significant impact on your financing options for example lenders will look at financing a retail property very differently than they would on a multi-family property they can all have different interest rates amortization schedules down payment requirements and lender appetites there are also different investment strategies that you could use on any given project no matter which type of property you're buying stabilized properties are obviously easier to finance because of their certainty they're also not going to give you the highest returns development on the other hand and can bring significantly higher returns but are also significantly riskier and therefore more difficult to find lending finally you'll want to consider the potential return on investment how the project will actually make money potential for returns will vary property by property so you'll want to do a detailed financial analysis to determine if the property is even a good investment and if it's bankable check out this video here if you want to dive into how to underwrite and run the numbers on a property banks will often want to see a 1.2 to 1.25 times debt service coverage ratio that means a dollar twenty to a dollar 25 in revenue for every one dollar in mortgage payments you have in order to even consider financing a project step number three explore your financing options I recommend that before you even start searching for your first deal go explore a few different ways to secure winding on your investment if you don't have the money it really doesn't matter there are many different options available out there for commercial real estate each with its advantages and its own disadvantages Traditional Bank clouds conventional mortgages are loans offered by Banks and other financial institutions these loans typically require a down payment of around 20 percent or more offer a 20 to 25-year amortization schedule and can typically have fixed interest rates for a period of time conventional mortgages are the most common and are likely your best option SBA Loans the small business administration offers loans to small businesses including those looking to buy commercial real estate SBA Loans typically have lower down payment requirements than conventional mortgages and may offer more flexible repayment terms however I will say from experience getting approved for an SBA loan is a very intense process and you will have to also own or occupy the property hard money loans hard money loans are shorter term loans that are offered by private lenders this option is going to have higher interest rates and fees than any other type of loan often charging 11 or more but they can be a good option for investors who need financing quickly or couldn't otherwise qualify for a loan word of caution here though you must have several exit strategies with this option so you don't find yourself underwater seller financing some property sellers may be willing to carry the mortgage for the buyers and you could even negotiate for no money down essentially having the seller act as the bank this option can be a good one if you're having trouble getting approved for a conventional mortgage or if you'd like to get creative with the debt structure seller financing may also come with higher interest rates and stricter repayment terms depending on the seller but I've found it to be a great way to both buy and sell commercial real estate it's important that you explore each of these financing options and compare the rates terms requirements and whatever else that each lender may have prior to even starting your investment search your commercial real estate broker your attorney or your CPA can likely point you towards financing options to help you get started step four prepare your lender patch with this being your first purchase as a commercial real estate investor there are several things that you will need to prepare in order to actually secure financing for this property here are a few key items that pretty much any lender will want to review a business plan you should have a solid business plan that outlines your investment strategy including why the property is a good purchase how the property will make money or at least cover your debt payments if you're under occupying and any plans that you have for updating the space as well as your exit strategy financial statements winners will want to review your financials to verify that you have enough cash on hand to make the investment surprise surprise I recommend three years of tax returns some banks will take two as well as a personal financial statement and six months of bank statements credit score your credit score isn't as important of a factor in determining your eligibility for financing as it is in residential real estate but lenders will still take it into consideration after all it is a relative determining factor in the risk associated with you as a borrower property information this piece will likely be provided added in your business plan but winners will want you to provide detailed information about the property that you're interested in purchasing this would include the location the size the condition of the buildings its potential for generating income I typically pull a tax record report from CRS data or send the offering memorandum that the seller put together to give the lender an overview due diligence materials lenders will conduct their own due diligence on the property before they will consider giving you financing this may include property inspections environmental assessments and other documentation to assess the property's value in any potential risks so any of that documentation that you can provide will help build your case for them while they're working to get you that well he's got documentation if you can gather these items in advance your chances of securing financing on Commercial Real Estate will certainly increase it's also important as a first-time commercial real estate investor that you work with a knowledgeable and experienced lender one that can guide you through the process and provide valuable insights and advice along the way step 5 closing your deal and Loan adherence once you've secured financing for your first commercial property it's time to close the loan but your job is not quite over here are some important things to keep in mind closing the loan before closing make sure you have all the necessary documents in order and that you understand the terms and conditions of that contractual document I always recommend having an attorney review the loan agreement with you mistakes happen in these documents all the time so get your eyes on them after closing it's critical that you understand and adhere to your ongoing loan requirements on a basic level that includes making regular loan payments maintaining the property in good condition and providing Financial updates to the lender but it could also mean maintaining a minimum debt service coverage ratio among other tripwire items stay in communication with your window it's important to maintain a strong relationship with them throughout the life of the loan if you experience any financial difficulties that relationship will certainly help you overcome any obstacles and if you have any questions about the loan don't hesitate to reach out to your lender for assistance look at them as your financial partner after all they are the biggest money partner in your deal and monitor market conditions keep your eye on what's going on with the market where interest rates are so that you know you're getting the best possible deal on your loan if interest rates start to drop for example it may be worth exploring refinancing options to save on interest costs you could also pull Equity out through a line of credit if the property value has increased significantly do a little commercial Burr plan for loan maturity most commercial real estates have a maturity date in the five to seven year range which means the loan must be fully repaid at that time make sure you are prepared to repay the loan before that date arrives by exploring options for refinancing selling the property or paying off the loan with any excess cash you'll find a link to download my free commercial real estate Lending checklist in the video description below it's actually the one that my team and I use on every single deal and just because you know how to put the debt together on a property doesn't necessarily mean that you've got all of the cash that you need on your end so watch this video here on how to raise money from private investors
Info
Channel: Tyler Cauble
Views: 11,779
Rating: undefined out of 5
Keywords: commercial real estate, commercial real estate investing, real estate investing, buying commercial real estate, passive income, passive investments, Financing commercial real estate, Financing commercial property, Commercial lending, Commercial property lending, Funding commercial real estate, Debt financing commercial real estate, Commercial real estate debt
Id: SP7Y3hfxsRU
Channel Id: undefined
Length: 10min 30sec (630 seconds)
Published: Sun Jul 02 2023
Related Videos
Note
Please note that this website is currently a work in progress! Lots of interesting data and statistics to come.