Understanding Commercial Building Financing

[Francisco Ycaza]

Good evening Colleagues,

I join BP just about 2 weeks ago and this is my first post . I sent out a Yellow letter to a owner of a small Commercial building in the Bronx , New York back on November 20 and 4 days letter I received a call from him. He was truly ecstatic that I contact him and wants to SELL!! He mention to me that he lives far from the property and just could not continue to travel to maintain it . We spoke last night and I made an offer of 60k and he told me that he was going to let me know in few days if we had a deal . I feel strongly about this potential deal because of our conversation that we had , which lasted for 20 minutes .

The Deal :

1 . The 2% Rule : states that the monthly rent should be 2% of the Purchase Price : 60k x 2%= 1,200 rental income . Property has a tenant paying 1,500 currently monthly and Tenant is paying Electric / Gas and Water bills.

2 . The 50% Rule : That 50% of your total income will be for your expenses. Taxes are $ 5,100 annually = $426.66 a month.

Monthly Cash flow 1,500- 426 = $1074

3. Financing - 100%Private lender or Hard Money

4. Exit Strategy - Buy and Hold

So this is where I am a confused to be honest and this why I am posting . Who do I get the funds to lock up this deal , when I have never use a PL or HM before ? Do I contact a Commercial Lender ? My credit is bad and my funds are extremely low to be straight forward . I just need some guidance with Financing this deal in case it happens because the numbers make sense . I appreciate any feedback from any of the members from BP .

Thank You,

Francisco Y.

[Don Konipol]

@Francisco Ycaza You are making a couple of assumptions that are not correct. The 50% rule is for residential property, the numbers for commercial property are all over the board depending on area, property type, etc. Some types of commercial properties have far less than a 50% expense ratio, a few have far more. Typically commercial properties are analyzed by cap rate for property type and area.

Secondly, NO lenders lend 100% on commercial property. With experience AND good credit 20% cash contribution by the borrower is minimum. Additionally and unfortunately, your lack of track record most likely precludes you from having any serious shot at putting together an investment partnership or syndication. What you may be able to do is find a buyer for this property and obtain a "finders fee" for yourself.

I recently received a financing request for a recreational vehicle park. The total price was about $775,000. We lent $525,000, the borrower put down $100,000 plus an additional $125,000 to improve the park, the seller carried back the rest in a second. What is of interest to you is that the buyer had found out about the rv park from a relatively new investor who had gotten a contract in her name. When the dust settled and the deal closed the original new investor received a $25,000 "referral fee, which the buyer was happy to pay. In your situation a similar "wholesale" would seem to be your best option.