What does "to look at your experience" for a commercial loan mean

Question

I am fairly new to investing, and thus far have stayed in the residential market.  No commercial loans, however my end goal is to get to that point so I have been reading up on how to get the loan, requirements, etc.   I keep seeing "investment experience is taken into account" for commercial loans.  What exactly does that mean and how do I prove it?

At this point, I am only doing research on the loans.  There have been a few 5 to 6 unit properties come up for sale, which I know means a commercial loan.  I figure before long, I will end up investing in these.  I understand the 25% down and how there is typically a balloon after 5 years, etc.  I am just not sure how to provide proof of experience...

Andrew Cushman · Answer

@Lynsey Staes What commercial lenders are looking for is the type and amount of experience you have owning and managing (either yourself or though a 3rd party) the type of asset which you are trying to buy. So, if you have a small portfolio of SFR, duplexes, and 4-plexes and are trying to buy a 5-10 unit deal in the same market, you will likely qualify since what you're trying to buy isn't a whole lot different than what you own. On the other hand, if you try to jump to a 100 unit apartment complex, you are going to need to bring in a partner that has experience owning and managing that sound of thing! Make sense?

As far as how to prove it, you simply provide a Schedule of Real Estate Owned, or SREO. It is simply a spreadsheet of everything you own with a bunch of facts relating to those properties, such as the value, how long you've owned it, wtc.

Andrew

As far as how to prove it, you simply provide a Schedule of Real Estate Owned, or SREO.  It is simply a spreadsheet of everything you own with a bunch of facts relating to those properties, such as the value, how long you've owned it, wtc.

Andrew

Jason Hirko · Answer

@Lynsey Staes Strong W2 income will alleviate some of the lender's concerns, as will strong liquidity. What will be a deal breaker is if someone says "I'm new to this and just quit my job!"

As for proving the experience - there are plenty of things that aren't directly related to commercial RE investing that show experience. For example, are you a CPA? You could list background in RE accounting laws/practices. Are you a plumber? '20 years specialty construction experience.' Anything is better than 'None.'

Russell Brazil · Answer

Bringing on a partner that has experience may alleviate a lenders requirements. Also having a high amount of liquidity will make getting a loan easier.  Commercial lenders much prefer to see high liquidity as opposed to a high net worth where that net worth is locked up in an illiquid asset like real estate.

Bhekizwe M. · Answer

Thanks for clarifying.helpful to understand lender's side

Joel Owens · Answer

Commercial lenders use guidelines. Just because you have something or not doesn't mean an automatic YES or NO.

It's all situational.

Joel Owens · Answer

Hi Lynsey,

Yes right now you are working for yield which is a job. As assets and net worth grow over time investment plans can change.

You are in a cold belt state. If you are weak suburban to rural those areas can be weak for retail. My clients tend to buy in sun belt states where a lot of growth is happening and national retailers want to be.

When investors get to where they have millions they are willing to take less yield for a headache free type asset.

For 2,3,4 unit multifamily properties call around to property management companies that have units listed for lease. Ask them if the owner would sell? Also you can call divorce attorneys, probate attorneys, etc.

Lynsey Staes · Answer

@Joel Owens  Commercially we are researching storage units or a smaller apartment complex (10 or fewer units).  The plan would be for us to manage the property so relatively close to us is a must.  This is part of our retirement plan, however that is definitely not set in stone at this point.  I am researching to hopefully get a better plan in place.  We do know that we want to stay away from retail, in our area it just seems to be dead.  Lots of vacant buildings and such.

Current assets and the additional assets I am looking at for rentals (non-commercial) are all older homes.  I do not even bother looking at new builds as my cash flow is not high enough on it at the moment, nor is my return on investment.

Our general method for evaluating properties is to look at the monthly cash flow (clearly we want this in the positive).  Our goal is about $300/unit cash flow.  We also put down 25% to get a lower interest rate.  If it is a duplex or triplex, we try to get it to where only one unit needs to be rented to pay the monthly mortgage.  Lastly we  look at rental history, fortunately we have known a few of the other investors in our area and the one duplex I was pursuing, we were able to get 3 years rental history for.  Unfortunately, an offer was accepted prior to me making an offer, it really was not on the market long.

Joel Owens · Answer

Experience relates more to the type of asset.

Multifamily more intensive to operate. So is self storage.

For retail assets which is what I do with high net worth investors it is not as important. The tenants play a more vital role there.

For example if you have a 3 unit retail strip center that is Starbucks, Verizon, and Batteries Plus corporate the commercial lender looks more with the length of primary lease term, how good the guarantee is on the lease for each tenant, quality of location,etc.

You can have a professional commercial management company that manages millions of sq ft run the asset and the lender tends to feel comfortable.

Retail the entry level is higher for quality usually a purchase in the millions minimally. If you are buying 10 multifamily units and under keep it local to where you live if possible. Unless you are buying brand new which can be around 80k -100k a door then you are looking at older type properties at 30k-50k a door that need constant upkeep due to age.

Lynsey Staes · Answer

@Andrew Cushman  Thank you!!! That makes sense and is the info I was looking for.  The term Schedule of Real Estate Owned is what I needed.  I didn't think it was difficult, just wasn't sure what I needed or what it was called.  I tried to google it in generic terms, but wasn't quite finding it.  I figure at this time, it is at least two years out before I will qualify (financially and experience) for a commercial deal.  Our current plan would be to acquire storage units, however that could change to larger multi-family homes.  Either way, I like to have a plan in place and everything documented ahead of time.

@Stephen Lofthus  Thank you for the reply as well. I am working on building up my portfolio as well.  Really I am not doing too bad for having no experience when I started.  We have learned a decent amount along the way and I am getting more and more comfortable with things.

What does "to look at your experience" for a commercial loan mean

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