Getting a commercial investment property loan for your new project may seem intimidating. There is a lot of conflicting information, many lenders with special financing solutions, and many things to consider before choosing the right financial product for you. Still, you will need funding for your new commercial project, so you must know the specifics about this type of product. Here are the main steps to focus on when trying to secure a commercial development loan:
Working As an Individual vs. an Entity
This is the first thing to focus on – do you want to work as an individual or as an entity on your new commercial project? Even though virtually all commercial property is purchased by or rented to other business entities, like companies, other developers, or business partnerships, the actual development can be quickly initiated and completed by an individual investor. You don’t have to create an entity to get financing for your project. Lenders only want to ensure you can pay back the loan according to the lending contract. You will have to provide a financial record to secure a loan, but that’s about it. Lenders will ask for additional guarantees for new investors who don’t have a relevant credit history.
Understanding The Mortgage Options
Residential and commercial mortgages are not the same. For instance, unlike residential mortgages, commercial mortgages are not backed by federal government agencies like Fannie Mae or Freddie Mac. Similarly, commercial mortgages are more expensive than residential mortgages. Also, commercial loans’ terms and provisions differ significantly from residential loans. While residential loans may range from 10 to 30 years, a commercial development loan rarely goes beyond 20 years. You will have to repay the loan in 5 to 10 years. Of course, the terms and conditions and the repayment period will depend on your specific needs and your credit history.
The loan-to-value ratio is a significant financial metric that most lenders pay attention to. It measures the value of the loan against the value of the property. Basically, you divide the loan amount by the property’s appraisal value or its purchase price. Ideally, the loan-to-value ratio should be between 65 to 80 percent, but lower numbers are preferred. Try to get the loan-to-value ratio as low as possible, which will help you get better financing rates for your commercial project.
Debt Service Coverage Ratio
Most lenders will also pay attention to the debt-service coverage ratio (DSCR). The metric measures the property’s ability to service the debt. Typically, it shows how much debt the property can accept before it stops being profitable. It compares the property’s annual operating income to its debt, including the principal and interest. If the DSCR is lower than 1 percent, the property’s cash flow is negative. Try to get a DSCR of at least 1.25 percent to guarantee good, positive cash flow. A DSCR of at least 1.50 percent will get you the best rates.
Getting a commercial development loan shouldn’t be a problem if you have a good business plan and relevant financial documents. Contact Urban Bay Financial to get the funds you need for your new real estate project!