Business plan helpful for getting commercial loan?

[Brett Pirie]

Would writing a business plan with detailed financials help in getting a commercial loan?  

We are just staring out and much of the smart advice is to start out with a smaller property before moving on to multi-family.  We didn't plan to start this way, but we found at a 5 unit place where the cash flow numbers are looking good.  We plan to house hack it for 1-2 years and then hold it.  We're learning as we go, just jumping into things and our first commercial loan application was denied.  We don't have a history for lenders to look at, so is there anything else we can do to improve our chances of being accepted?  Would lenders like to see a well written business plan with detailed financials?  

[Tim Milazzo]

Hi Brett,

 The answer is Yes! As soon as you hit 5 units, you're in Commercial loan land and your personal finances and credit history are no longer the driving factor behind a lender's decision. Ideally, you'll want to submit a pro forma (financial projection) to potential lenders which is defensible. The lender will want to see that the money they lend to you will result in cash flow that covers the interest and amortization you owe them by a safe margin. You'll also be showcasing to the lender that you're prepared to be managing the property like the business that it is. The less of a track record you show them, the more they need to be convinced that the deal can stand on its own.

 Once you can prepare the story and the financials, the best next move is to reach out to several lenders simultaneously to see who can provide the best financing. Relying on one lender's opinion is tempting, but this is a free market and you should take advantage of that. A local lender might be the best choice, but not always - sometimes a national lender can come in and provide a great quote.

Last note, on "house hacking" - that's a strategy that's advantageous for 2-4 units, but it won't do you any favors in financing 5 units where it's now commercial. You won't get a better deal, and if the lender hears that's your plan, they may be concerned that it will lower your DSCR - the ratio between the property's income and the payments you owe to the lender. The lower that ratio, the riskier the lender sees the deal.