Commercial Lending

[Judy Parker]

Hi,

1. I make 40k a year, would I be qualified to get a commercial loan?
2. How is commercial loan different than personal loan?
3. I already own a house, mortgage is 1400 per month and someone is paying 1600 and I want to buy an apartment building is it possible with my salary of 40k?
4. How do people normally do this?
5. In your opinion is it better to buy houses and rent it out or buy commercial property like an apartment building and rent it out or buy an office and rent it out? What do you guys think is more profitable?
6. Is commercial loans really hard to get?

Thank you again.

Judy

[Jon Holdman]

A key metric for commercial lenders is the DSCR - debt service coverage ratio. This can also go by various other similar names. This is the net operating income divided by the P&I payment.

To carry on with your example, if you buy a million dollar property with 25% down and get a 6% 20 year loan, your monthly payments will be $5,373.23. A lender might want to see a DSCR of 1.3. That means the NOI must be $5,373.23 * 1.3 = $6,985.20. If its a well run building that is stabilized (i.e, vacancies are about what you would expect them to be in the area) that would translate into gross scheduled rents of about $14000 a month.

If the rents were less, which would make the NOI less, lenders would lend less. If the price is fixed, that means a larger down payment.

That's not to say that would be a good deal. With those number you would have cash flow of $1,611.97 a month or $19,343.64 a year. And you have $250,000 invested. That's only a 7.7% cash on cash return.

The property you already have isn't a very good deal, either. By a $1400 mortgage payment I assume that includes taxes and insurance. When you apply for another loan, the lender will take your 75% of your rent, less the mortgage payment. In your case, 75% of the rent is $1200. Subtract the mortgage payment and you're in the hole $200 a month. That's 6% of your gross monthly income. That makes it harder for you to qualify for a new loan.

Your personal income may not be too big a deal for a commercial loan, but the lender will want to see a good DSCR, a good down payment, and experience.