Do you want to get into commercial real estate?

[John Acheson]

Arguably, one of the 1st steps in commercial is to have a seasoned LLC to be able to get financing. I've been researching the main differences between traditional mortgages for residential and commercial lending and just found this great website at a lender website titled,

"Commercial Loan Requirements"

https://onenevada.org/loans/commercial-real-estate...

A current financial statement and a minimum of two years of tax returns (so you're going to have to wait til Year 3 before you can apply so better start that LLC NOW or look into buying an aged one) to include K1s on each borrower/guarantor. If the borrower is a business entity, please provide a copy of the articles of incorporation/partnership and operating agreement or copy of the trust agreement.

We will need a minimum of two years of income and expense statements, a current rent roll, copy of all leases and a copy of the fire insurance policy on the subject property (the things to ask from the selling broker).

The following third party reports will be required to complete the loan request, obtain loan approval and fund the loan. The borrower will pay for the following items:

• MAI Appraisal?
• Phase I Environmental Report?
• Escrow and Title
• UCC Search and Recording?
• Flood Search/ Flood Insurance (if required)
• Credit Reports (as in borrower, entity or tenant/s?)

What would be your game plan for getting into commercial financing?

[Matt Lefebvre]

@John Acheson this article sounds like the picture perfect borrower for a lender... but doesn't paint an entirely accurate picture. You don't need a "seasoned" entity to purchase real estate with commercial financing. In fact, investors form new entities all the time right before purchasing a property. The difference here might be if you're considering recourse versus non-recourse financing. Unless you have an existing entity with a solid set of financials (i.e. you own a landscaping business that is looking to purchase a commercial building or you own an entity that already holds several properties), the majority of these commercial loans are going to need to be personally guaranteed by you anyway. You can buy it in ABC, LLC... but the mortgage docs will have you on the line if they have to foreclose on the property because you didn't make your mortgage payments.

When you're dealing with purchasing commercial properties, yes some of those different reports may be requested, but depending on the size of the property you're looking to purchase, they might not be relevant or necessary.  If you're looking at acquiring a mixed-use, 30 unit building for $3M then yeah... they'll require a full commercial appraisal, an environmental report (might not need a Phase 1 here depending on what a quicker environmental survey brings up), and the others are fairly standard for a commercial or residential purchase.  

The bank will most likely require the deal to be underwritten at a specific DSCR (usually 1.25 or higher as @Dennis Wasilewski mentioned). Banks want to make sure they get paid... and they don't want the deal to be too risky. In that example, your total NOI (so after all of your expenses should have been subtracted EXCLUDING your mortgage) should be no less than 1.25 times your annual mortgage payment. So to break that down... if your property has a NOI of $125K/yr, your mortgage payment can be no more than $100K/yr or (usually) 75% LTV (which breaks down to roughly $8,300/mo... or approximately a $1.6M property depending on terms).

There's a lot of differences between residential and commercial lending... but I promise they're not too complicated and your lender will be there to work with you and get you to the finish line.  Let me know if you have specific questions though!  Always happy to answer!