Learn To Be A Fix & Flip Investor

Friday, January 5, 2018

The Requirements for Securing Commercial Real Estate Loans

Due to the dollar amount of most commercial real estate loans, the criteria to qualify is more stringent. It’s important to understand these requirements before you apply for a loan.

Not only are commercial real estate loans substantially larger than most other loans, they are also inherently more risky. This increased risk is due to the fact that most businesses financial health is very closely tied to the overall economy unlike the financial health of a consumer which is more insulated. To offset this risk as much as possible, lenders are much stricter about the qualifications for commercial real estate loans.

The first step in securing a commercial mortgage is to have the property appraised. Legally, the lender will need to have this process completed but it is not a bad idea for the borrower to also have an appraisal completed. It is critical that the property value be equal to or exceed the amount of the loan being requested. This is simply because the property will be the collateral for the loan. Most lenders want to see the property value at least 20% greater than the loan amount to ensure that the collateral is always greater than the outstanding balance of the loan.

When a business entity is making the purchase, the lender is going to want to verify that the business is financially stable and has the ability to make the loan payments. The lender will request documentation to verify the cash flow of the business as well as the debt that the business is carrying. Lenders prefer to see a steady net income 20% greater than the debt. It is also important that the business have some type of savings or other assets which are very liquid in the event that the business slows and cannot make the loan payments from the months’ income.

If the business entity does not have a strong credit history or is relatively new, the lender will require the owner of the business or owners to become personal guarantors. This basically means that the business credit history does not merit the loan and the owners are willing to use their personal credit history and scores to obtain the loan. This also means that the owners are willing to use their own personal funds and property as collateral for the loan.

Understand What Lenders are requiring

In many cases there are nonrefundable fees which must be paid to apply for commercial real estate loans. Knowing that your business or your personal credit is strong enough to secure a loan is very important before you begin the long process of a loan application and pay the fees to have the application processed. If you have any questions about the qualifications, you should invest your time in more research.

Due Diligence

There is a lot to understand when seeking a commercial loan and researching the process, the potential lenders and the criteria for securing a loan is a very smart choice. Speaking to a local bank or a mortgage lender is a good way to gather information and learn about the process to help you avoid wasting both time and money if you are not prepared to meet the loan application qualifications.

Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

Technorati Tags: commercial loans,commercial lending,commercial mortgage

Process for Obtaining Commercial Loans

There is really no shortcut when you are seeking commercial loans. But following a tried and true process can help to expedite the response to your application.

Most borrowers fail to understand that a great deal of the success or failure of their commercial loan application rests on their amount of effort in preparation. There is a huge amount of research and due diligence that a borrower must invest in the process in order to be successful when applying for commercial loans. Understanding the loan application process, the desires of specific lenders and their loan approval criteria are all very important and should be researched long before you begin to search for a commercial property to purchase.

Many borrowers are in awe of commercial lenders and fail to see them as a business partner or vendor. They get too caught up in the “bank” aspect and feel as if they are being judged. The lender is making a judgement but only from the perspective that they want to verify that you can afford the loan. They are just making smart business decisions. In that vein, you should also be making smart decisions about who you are interested in borrowing from. There are many options for commercial loans which you should explore including large national banks, medium sized regional banks, a small local bank, a private lender or a mortgage company just to name a few. If you are not familiar with any major lenders or to gain information about your options, begin with a meeting at your current bank to learn about their commercial loan products.

Each lender is going to have a slightly different set of criteria for approving a loan. Learning these requirements can help you to determine which lenders you will actually apply to. Set up a few appointments to speak to loan officers to learn about the lenders and what they have to offer you. Be prepared to discuss your business, the reason you are requesting a loan and how you plan to meet the financial responsibility of repaying the loan. These conversations can glean some very helpful free advice for you from seasoned lending professionals.

Select Lenders Who Best Meet Your Needs

Not all lenders are going to be a great fit for you or even a fit at all. If you are looking for a small loan then a national bank might not be interested in your application. Likewise, if you are seeking a very large loan, then a small local bank might not be your best choice. Try to determine which lenders specialize in the type of commercial loans that you are seeking and then apply only to those lenders. There are costs involved in commercial loan applications as well as a commitment of time. Don’t waste either by applying to a lender who will not be interested in your business.

Make a Great First Impression

Other than a brief introductory meeting, your loan application will be your first contact with many lenders. This is your only opportunity to create a positive and professional first impression. Invest all of the time that you need to research your options and the criteria that each lender uses to evaluate loan applications. Only then should you begin to compile your documentation and complete the loan application. This dedication to completing a high quality loan application and documentation packet will pay great dividends when you learn that you have multiple loan offers at very competitive rates.

Technorati Tags: commercial loans,commercial lending,commercial mortgage

Thursday, January 4, 2018

Key Differences between Commercial Loans and Residential Loans

Knowing the differences between commercial loans and residential loans will help you to understand the lengthy process when applying for a commercial loan.

Most consumers think that the process to apply for a residential loan is fairly in-depth and thorough. But if they were ever to apply for a commercial loan they would begin to look more favorably on the residential loan application and approval process. Because of the larger sum of money involved and the greater risk and volatility in the commercial real estate market, commercial loans and the application process can be very intense.

When a consumer applies for a mortgage, the lenders first concern is their income and its stability as well as their debt load. Consumer’s debt should be no more than 45% of their income. But commercial lenders are more interested in the ability of the property to generate income to pay the loan. This is called a Debt Coverage Ratio and lenders prefer to see the ratio at 1:1.25 at the least. This means that the income to cover the loan payments is relatively secure.

A down payment on a home is somewhat negotiable and in some cases is very, very small. But due to the increased risk associated with commercial loans, these down payments are normally 20%. This gives the lender the added security of knowing that the property is valued at 20% more than the initial loan amount. Even in the event that the borrower defaults early in the loan, chances are good that the property is still valued at the full payoff on the loan.

Time Is Critical for Commercial Loans

A normal residential mortgage loan can range from 15 years to 30 and some even stretch as far as 40 years. But a commercial mortgage loan rarely exceeds 10 years. This is because lenders want to decrease the risk of the loan by getting their money back faster. In addition, consumers can pay a mortgage loan off early and save some of the interest that they would have paid over the term of the loan. This is not the case for a commercial mortgage. And in fact, there can be penalties which must be paid called prepayment penalties. In more cases the penalty decreases the further into the loan you progress. But the lender wants to be sure that they make their desired profit, or earning, on each commercial loan they write.

Not Really Even Similar

A consumer mortgage and a commercial property loan are only similar in the fact that it is a loan to purchase property. The dollar amount of most commercial loans is substantially larger than the average home loan. In addition, commercial real estate values are very volatile and can change drastically and very quickly. This is an added risk for the lender. Due to these increased risks, lenders are much more particular about the loan applications which they approve and the terms for which they will offer the loan. Having a good understanding of the lenders approval criteria can save a borrower a great deal of time in completing lengthy commercial loan applications if they don’t meet the lenders criteria.

Technorati Tags: commercial loans,commercial lending,commercial mortgage

Criteria for Selecting Commercial Lenders

Evaluating commercial lenders can be a difficult task. But preparing a list of criteria to use for selecting the best lender to meet your needs can be a great time saver.

As a business professional, both your time and your money hold a great deal of value. So it is important to find a lender who will meet all of your needs. Ideally, you will be able to evaluate enough commercial lenders to select a few to forge long term relationships with to ensure continued financial prosperity. The process will undoubtedly take some time but the long term benefit will be a good working relationship with a primary lender as well as other secondary reputable lenders.

Commercial lenders are all about money. You would not be seeking a commercial lender if you did not need money. But you should look at these relationships as you would any other vendor who is supplying a good or service to your business. You need to compare the merits or the service each lender is willing to provide to you. This means what type of fee structure are they offering, what is the interest rate and how quickly can they deliver on their product; your loan funding.

You will also want to evaluate the core qualities of the lenders existing clients. Do they cater to a certain industry or type of loan? Do they have a specific loan size that they tend to service? Are they familiar with your business and the type of loan that you are looking for? All of this information will help you to determine the level of responsiveness and the quality of the service that you will receive if you do business with the lender. Customer service might not jump out as an important factor when securing the loan but if you ever have an issue or want to restructure your loan, then customer service could be one of the most important features the lender offers. Think long term for customer service and product lines available. Meeting your long term needs with a single lender will save you a great deal of time in the long run.

Comfort and Compatibility

Think of your lender as a strategic partner. You will need to discuss confidential financial information as well as other proprietary information about your business. It is important that you are working with a lender with whom you have a certain comfort level. The more honest and up front you can be with your lender the more benefits they can provide to you.

Invest Time to Evaluate for Long Term Success

Creating a list of criteria to evaluate commercial lenders will require an investment of your time today. But the benefits will continue to reward you each time you complete a new loan from your lender or seek advice. Carefully consider the fees and interest rates associated with the different lenders, but also recognize the added value that customer service and fast response time can add to your relationship. Knowing that you have a lender who will meet all of your needs for the long term is worth the time involved in a careful selection process.

Technorati Tags: commercial loans,commercial lending,commercial mortgage

Benefits of Non-Recourse Commercial Loans

There are many options to explore when seeking commercial loans. One of the factors which can reduce personal liability and risk of assets is a non-recourse loan.

As you begin to explore the options for commercial loans you will quickly find that there are two main categories for these loans, recourse and non-recourse. The more common of the two is the recourse loan which requires the borrower or borrowers to personally sign as the guarantor of the loan. This simply means that in the event of business failure or inability of the business to make the loan payments for any reason, then the guarantor is personally responsible to make the payments. Obviously, this presents a significant personal financial risk to the guarantor.

Non-recourse commercial loans do not require the borrowers to become personal guarantors of the loan. Therefore, these loans do not require the risk of the personal assets of the borrowers. This is one of the biggest advantages for any borrower. Knowing that a business failure means the loss of income is bad enough but to also be faced with the responsibility of personal liability on a commercial loan can be devastating. No business owner ever chooses to take out a loan which they believe the business will default on but there is always that rare possibility, and the added stress of personal liability. But a non-recourse loan eliminates that stress and potential issue.

An additional benefit is that non-recourse loans are assumable. This can be a huge advantage if you plan to sell the property in a few years or if a situation changes and you need to sell the property quickly. Currently, commercial lending rates are very favorable, but they are expected to increase. So the current loan rate is likely to be much lower than a rate which will be offered on a loan in a few years. So when you do decide to sell the property, you have the ability to offer to have the buyer assume your loan. This will be a great incentive for the buyers as the interest rate could be significantly lower than the current rate.

The Perfect Non-Recourse Loan Candidate

Non-recourse loans are most often used to purchase properties which provide a strong cash flow as the property is the only collateral. This means that even if the property is not the more visually appealing or if it needs a face lift, it could still be a candidate for a non-recourse loan. The critical factor is the cash flow. As long as the property is generating 1.25 times the proposed payment of the loan then lenders will be eager to offer this financing solution.

Great Benefits if the Fit is Right

Non-recourse commercial loans can offer a huge benefit for the right borrower and the right commercial property. Knowing that the property does generate a strong and steady cash flow allows the borrower to get a great loan and rate without having to personally guarantee the loan in the event of a business failure. It also provides added benefits to the borrower when it is time to sell the building by allowing the buyer to take advantage of a lower interest rate on the assumed loan.

Technorati Tags: commercial loans,commercial lending,commercial mortgage

Monday, December 11, 2017

The Differences between residential and commercial real estate loan terms

Commercial real estate loan terms differ in some important ways from residential loan terms. This is because commercial properties are financed by groups, come with different payment schedules and have different property valuations.

A major difference between the two types of mortgages is who actually takes out the loan. Residential mortgages are almost always made to individuals. Commercial mortgages on the other hand are usually lent to entities like corporations, trusts or similar groups. The groups themselves may or may not have an established financial history. A commercial lender will therefore look closely at the finances of the groups individual owners and may require them to individually pledge their personal property as collateral before any loan is approved. This is known as recourse, or secured loan. With residential mortgages the value of the home is usually enough in terms of collateral and the bank only considers the credit history of individual borrowers.

A traditional residential mortgage is often amortized. This entails the borrower making fixed payments over the course of the loan which goes toward both the loan interest and the principle. This means most residential mortgages are paid in full once the loan matures. Commercial mortgages usually entail balloon payments were a borrower makes monthly payments for a period of time. However once the loan expires the borrower must repay the remaining loan balance in full. Commercial mortgages also usually come with pre-payment penalties built in. A simple prepayment penalty entails the borrower repaying the outstanding loan balance multiplied by a given number. There are also interest guarantees, where the lender is entitled to a certain amount of interest even if the principle is paid off in full. Some commercial mortgages may simply have lock out periods, in which the borrower can’t make any extra payments towards the loans principle for a given period. Since the recession, very few residential mortgages are structured around balloon payments and very few come with pre-payment penalties.

Commercial real estate loan terms for commercial properties, are evaluated based on a debt service coverage ratio.

A debt service coverage ratio (DSCR) is the amount of income a property generates when compared to the owners debt obligations. Such a calculation does not apply to residential mortgages, as residential properties don't generate income (however a residential borrower’s income may be compared with their outstanding debts). For example if a property generates 140,000 in income annually and the outstanding mortgage is for 100,000 dollars then the DSCR is 1.4. A DSCR helps lenders evaluate how much debt a commercial borrower can carry. A DSCR less than 1 indicates that the property doesn't generate enough revenue to meet outstanding mortgage obligations. Lenders usually require commercial properties to have a DSCR of at least 1.25 before any mortgage can be approved.

Commercial mortgages are usually made for a smaller share of the properties current value

Something all lenders consider is the value of a loan compared the value of the property being financed; this figure is known as an LTV. This indicates how much equity an owner has at stake in the property being financed and in the case of residential and commercial mortgages the lower and LTV the better. Due to government programs some residential borrowers can qualify for mortgages approaching 100 percent of their properties market value. Commercial borrowers very rarely get loans exceeding 80 percent of a properties market value. This means commercial mortgages usually come with significant down payments.

In summary, the terms of a commercial mortgage are different because borrowers are usually groups of investors. Commercial mortgages often come with balloon payments and pre-payment penalties which are uncommon among residential mortgages. Commercial properties are also valued differently and this greatly impacts the terms of a commercial mortgages and how much money a borrower can receive.

Technorati Tags: commercial loans,commercial lending,commercial mortgage

Business Loans: Things borrowers should consider.

There are many different types of business loans, but every borrower should understand whether their loan is secured or unsecured and how their loan is structured.

Every business owner should understand whether their loan is a secured or an unsecured loan. Unsecured loans are not secured by collateral. Collateral can be a borrower’s personal property, real estate or equipment. Most business owners won’t qualify for an unsecured loan. Unsecured loans require exceptional credit and an extensive track record of financial success. Therefore most business loans will be secured by collateral. The borrower must pledge some property up front in order to cover the cost of the loan in case of default. Secured loans are common when a lender perceives risk, when a loan is made on a long term basis or if a loan is used for new investments like equipment or real estate.

Every business owner should also understand how their loan is structured. Most commercial loans are issued as “balloon loans.” During the course of these loans a degree of principle may or may not be paid down, but once the loan matures the remaining balance in terms of principle and interest must be paid back. Some lenders will even allow borrowers to offset interest payments, but that means a higher amount of money will be needed once the loan expires. Prior to taking on a business loan, the borrower should understand to what extent their monthly payments will apply to the principle of the loan and whether these payments will pay for the full loan amount once it matures.

The most common type of business loan is a business line of credit. These loans don’t usually require collateral and are rarely structured around balloon payments.

Credit lines are flexible short term loans and help many business owners cover their expenses should their cash flow stall. With a business line of credit a lender extends a fixed amount to the borrower. The borrower then makes withdraws from these funds in order to cover unforeseen expenses or routine costs. The advantage with a business line of credit is that the borrower only pays interest on the amount of money they actually withdraw instead of paying interest on the full loan amount. Interest is usually paid every month and the principle is paid off at the borrower’s convenience. While a line of credit is a flexible arrangement, these loans are intended to purchase inventory or to help a business cover basic expenses. A line of credit should not be used to make a long term investment.

If a business owner is worried about the risk of a balloon payment type business loan, they may seek an installment loan in order to make long term investments.

An installment loan can take on many forms. However an installment loan always entails a fixed monthly payment that covers both the principle and interest of the loan. This helps borrowers avoid the looming deadline of a massive balloon payment. The terms of an installment loan always correlate to its use. A short term installment loan (or a business cycle loan); can have terms of four months to seven years. Installment loans for longer term investments, like equipment or real estate, usually can come with terms up to 21 years. Most importantly installment loans are fully amortizing, making less risky for most business owners.

Business owners should be aware of the differences between a secured and unsecured loan and know whether or not their loan is fully amortizing. To avoid the risk of balloon payment business owners should seek out a line of credit or a simple installment loan in order to cover routine costs or make long term investments.

Technorati Tags: commercial loans,commercial lending,commercial mortgage

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Friday, January 5, 2018

The Requirements for Securing Commercial Real Estate Loans

Due to the dollar amount of most commercial real estate loans, the criteria to qualify is more stringent. It’s important to understand these requirements before you apply for a loan.

Understand What Lenders are requiring

Due Diligence

Process for Obtaining Commercial Loans

There is really no shortcut when you are seeking commercial loans. But following a tried and true process can help to expedite the response to your application.

Select Lenders Who Best Meet Your Needs

Make a Great First Impression

Thursday, January 4, 2018

Key Differences between Commercial Loans and Residential Loans

Knowing the differences between commercial loans and residential loans will help you to understand the lengthy process when applying for a commercial loan.

Time Is Critical for Commercial Loans

Not Really Even Similar

Criteria for Selecting Commercial Lenders

Evaluating commercial lenders can be a difficult task. But preparing a list of criteria to use for selecting the best lender to meet your needs can be a great time saver.

Comfort and Compatibility

Invest Time to Evaluate for Long Term Success

Benefits of Non-Recourse Commercial Loans

There are many options to explore when seeking commercial loans. One of the factors which can reduce personal liability and risk of assets is a non-recourse loan.

The Perfect Non-Recourse Loan Candidate

Great Benefits if the Fit is Right

Monday, December 11, 2017

The Differences between residential and commercial real estate loan terms

Commercial real estate loan terms differ in some important ways from residential loan terms. This is because commercial properties are financed by groups, come with different payment schedules and have different property valuations.

Commercial real estate loan terms for commercial properties, are evaluated based on a debt service coverage ratio.

Commercial mortgages are usually made for a smaller share of the properties current value

Business Loans: Things borrowers should consider.

There are many different types of business loans, but every borrower should understand whether their loan is secured or unsecured and how their loan is structured.

The most common type of business loan is a business line of credit. These loans don’t usually require collateral and are rarely structured around balloon payments.

If a business owner is worried about the risk of a balloon payment type business loan, they may seek an installment loan in order to make long term investments.

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