New to (commercial) REI - typical to get max loan approval prior?

Question

I'm very new to real estate investing, but there is one thing I wanted to get clarified - is it typical for a person to already have a pre-approved loan for a given amount, before looking more seriously into buying a property?

Specifically, I'm wondering if it makes sense to already have some sort of pre-approval in order to know the max amount a bank will loan me, so I can get a sense of what my upper cap is. Is this typical, or will I look silly if I walked into a bank and asked for this?

Rob Boese · Answer

@Steven Rogers

@Douglas Dowell

These days lenders will look at the property first to see if it is a good investment vehicle. they will now look into you to see if you will guarantee the loan personally in case of default Commercial pre-approval is non-existent as it has no bearing on the investment situation. You can always go hard money/private lender or look for owner financing. Better yet, look into master leases. AKA: Commercial rent to own. I agree with Douglass, avoid high fees unless you paying someone to do all the work in securing the financing for a tricky investment. Take a look in SBA loans, they have some amazing programs.

Additionally, I would never feel embarrassed to ask questions to a lender. It does not matter if you are a first time investor or this is your 100th property or loan. You will get burned in commercial if you don't. The onus is always on you to ask the questions. If you end up in court, the judge will ask you if you asked or not. If you didn't, the judge will likely rule against you for not doing so. Then you may end up feeling silly. Commercial is much less forgiving than residential, hence there are fewer players.

Joel Owens · Answer

Hi Steven,

Sure that does help.

Retail is what I do day in and day out.

2,500,000 would be your target price.

Cap rate 8's with debt fixed in the 4's for 10 years with a 30 year amortization loan. Cash on cash with 25% down going in will be mid teens. The strip center will be a mix of national to regional tenants. Targeting warmer climate states with above average median income levels and population growth.

Most of my clients are going for Texas, Georgia, SC, NC, TN, FL.

There is a lot of metrics that go into buying retail and the process. I can talk a lot faster than I can type.

I am thinking of putting together a book as I am getting many requests for it. All the best.

Steven Rogers · Answer

@Joel Owens Thanks for the response. To answer your question - lets say it's a retail shopping center, and I have up to 600,000 cash on hand for downpayment + closing costs, and another 300k or so in reserves? Would that help provide some transparency?

Joel Owens · Answer

Hi Steven,

It's all about the money you have and the property.

I represent clients with millions in cash to tens of millions that are high net worth investors.

The loan terms in commercial real estate vary on the asset type.

Hotel, multifamily, retail, office, industrial, etc. are underwritten with a different set of metrics. Each asset class has positives and negatives. The type of loan and cash on cash going in you can generate will depend on if you are buying a vacant property, half full, or fully stabilized and the asset class.

Small balance loan mom and pop CRE under 2 million is way different than how larger properties are handled.

To get into the better loans typically about 750,000 is needed in capital. 500,000 for down payment at 25%, 50,000 or so in closing costs, 200,000 for reserves for any "liquidity event" as lenders put it to pro up the property.

Rather than going over a bunch of info that may or may not apply to your specific situation it's just easier to get people on the phone and review the PFS statement of the liquidity and net worth to fill out and send to me.

CMBS and Life Insurance lenders operate very differently than local banks giving loans and their expectations are different for a lot of reasons.

I hope it helps.

If you can say what type of asset class you are thinking of an how much you can put down with 25% then I can narrow down my response further.

Steven Rogers · Answer

Very helpful information, thank you both.

@Rob Boese Thanks, I asked about this because I hear from people that they went to the bank 'and couldnt get a loan for $x amount' and were only able to get '$y amount' - but these are people who have not found a property and were probing. So I was a bit confused on what they went adn got the loan based on. Would be great to get some light shed here if you or anyone else has any.

@Douglas Dowell Excellent analogy! Since you seem to be experienced in the space, do you maybe have some real-world numbers/examples to share?

Thanks!

Douglas Dowell · Answer

@Steven Rogers your correct I did mean 25 to 40 percent cash down payment into the deal.

Your balance sheet question is a very good question...it will vary widely by context.  That is why you will see alot of joint ventures and syndication in the commercial arena.   Commercial deals are like a cooking a recipe.   If you don't have an ingredient: find a neighbor who does.

Steven Rogers · Answer

Thank you very much for your answer.

I agree the loans are very specific to the strength of the property - but I also wanted to get a sense of just how big of a loan I could be qualified for (assuming the property is in acceptable condition cash-flow wise). For example, reasoning about how much in assets I must show to get a certain loan amount, etc.

Also, when you say 75% for stabilized properties, 60% for non stabilized - do you mean as in 25% down payment expected vs 40% downpayment? Or something else?

Douglas Dowell · Answer

Hello @Steven Rogers ,

Welcome to BP.  Pre-approvals are not really relevant in the commercial arena if you mean 5 units or more multifamily.   Each deal is highly specific to the property as much as the operator.

The best you can do really is network with lenders or contact a great commercial mortgage broker to get a feel for what the prevailing ltv's for your food group (i.e. office, mixed use, industrial, hotel) are.   Expect  75% for stabilized properties and 60% for non stabilized as a good ball park.

Avoid large due diligence fee's.

New to (commercial) REI - typical to get max loan approval prior?

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