What is the impact on my ability to get commercial loans if I quit my full time job?

Question

My wife and are working hard to make career transitions into real estate investing.   We are planning to do our first deal(s) before the end of 2015.

I currently have a well paying job with a reasonably high net worth and we have great credit so we expect to be able to get favorable loan terms.

We are primarily looking at buy and hold single family rental properties as well as smaller multi-family/apartment opportunities (2-20 units to start).

We intend to form a corporation to hold our properties and gain tax benefits.

However, we are talking about doing this full time (I would quit my job at some point) and we were unsure what the impact of this decision might be on our ability to get loans.  We know commercial loans look more at the quality of the deal, rather than our personal credit but we have read articles that suggest some banks WILL look at personal income which might be low while we are growing our portfolio.

Any advice would be appreciated.

Lenna

Joel Owens · Answer

Hi Lenna,

Anything really about under 3 million in commercial it will be hard to land CMBS debt. CMBS looks more at your liquidity and net worth with non-recourse versus you having a J-O-B.

Local to regional banks underwrite commercial property differently. Full unlimited recourse against you and they want to stick you in a box of requirements. That will likely be where you run into problems.

2 to 20 units is very small in the commercial world so likely a local bank you will be dealing with. I have heard some multifamily lenders will go down to 1 million non-recourse. the borrower and the property has to qualify generally.

Generally my clients show me their liquidity and net worth statements and we hop on a call. If you are going after smaller deals you might not want to quit the job yet. Qualify for a few properties and then buy into larger properties where it is not an issue or you can still  go with a local bank but have established a track record by then.

New buyers entering commercial typically do not understand the debt markets and how that impacts a potential investment. I have to spend time to help them learn the process.

Hope it helps some.

Lenna Groudan · Answer

Thanks Brie and Ashley, this is great info :-)

Ashley Pimsner · Answer

I agree with @Brie Schmidt if you develop relationships with local banks and credit unions in the area you are doing business in, then not having a job should not be a problem.

However, it is imperative that you ask the right questions of these local commercial portfolio lenders before you quit your job.

1- do you have income or net worth requirements?

2- do you have geographic restrictions?

3- do you check my personal credit, what is minimum score, do you report to credit bureaus ( the answer should be no ) as the investment property qualifies not you as an individual.

4- what is you DCR ( debt coverage ratio) and ARV ( after repair requirements ) normally 1.25 and 70% respectively, although it can vary from 65-80%.

5-IMPORTANT- what are your seasoning requirements after property is repaired and stabilized... Some require between 6-12 months before new improved ARV is used for calculating value. This is important if you are trying to take out a private or hard money loan.

7- is this a recourse or non recourse loan and do you require a personal guarentee?

8- what are the terms of your loans... Normally portfolio lender have 3/5/7 year balloons with 20-25 year amortizations, and what are your origination charges and rates, do you have a prepayment penalty?

9- do you offer blanket loans that can envelope a group of properties with one payment for all?

10- can you cross collateralize?

11- BE ADVISED a local portfolio lender usually only lends to a business entity like an LLC and not to an individual, so prepare accordingly and find a good real estate attorney familiar with LLC or series LLC, and land trust formation.

I would also recommend that you send them a potential deal in advance of purchase, or if you are a newbie, an example of what a potential deal would look like to see if it meets the local commercial portfolio lenders requirements.

Better to be forewarned so you are forearmed!

Best of luck.

Brie Schmidt · Answer

I would find a commercial lender first and build a relationship.  I closed on my first deal with mine and made sure quitting my job would not effect my future growth with them first.  So far it has been a very fruitful relationship

Lenna Groudan · Answer

Thanks a lot for the info, that was very helpful :-)

What is the impact on my ability to get commercial loans if I quit my full time job?

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