It’s A Bird! It’s A Plane! No, It’s an SBA Lender!

In commercial lending, you don’t go get a pre-approval letter and then go to a Realtor and say, “Here is what I am pre-approved for.” Instead, in commercial real estate financing, you find the property, get the financials on the property, and then go to the lender and say can I make this work?

There are some basic things that you need to know prior to speaking with a commercial lender to know if you can make the deal work. You need to be aware of how much money you are going to need to cover the down payment and closing costs. You need to know if the property has enough money to meet the debt coverage ratios. You need to know your credit scores.

In residential real estate, the property is based on your income and whether you can repay the loan with your current financials. In commercial lending the property can help you. The property should be generating income. This is the first question that the lender is going to ask. If your property isn’t generating income yet, then you need to be able to show the lender that it will be able to generate enough income to cover the debt after you take over.

Most banks want the property to generate enough income to cover the monthly payment plus an additional 25%. This means that the property will generate enough income to cover the payment and an additional 25% of the payment to cover expenses. This is called the debt coverage ratio. Most banks want a 1.25 debt coverage ratio, but this number can vary depending on the bank. Basically, if your payment is $4,000 the bank wants to see the property generating $5,000 a month in income.

There are different types of lenders in commercial real estate. There are traditional lenders who work with banks and require anywhere from 20% to 40% down to make the deal work. They want pristine credit, and they want a property that is performing at its best. You usually pay top dollar for these properties. We are looking for properties that may not be performing at peak performance so that we can get them at a discount. In other words, they don’t like our properties. We have to help them see that the property has the potential to perform at a much higher level.

Luckily, there is also an SBA lender. These are fantastic lenders to work with. They typically require only 10% down. Often you can finance the repairs to the property as well as some of the equipment that you will need for the office. This is substantially less down than a traditional lender. This way you can use the capital that you are saving to buy additional properties. For example, if you are buying a Million-dollar property, with a traditional lender you will need up to $400,000 down. With an SBA lender you will only need $100,000 down. You will have $300,000 left over. This means you can buy 3 more properties. If you are just getting started, it means that you saved $300,000.

If you know that you can get an SBA loan and that you have $250,000 to invest, then you know about what you can afford to purchase. You know that you will need 10% down plus closing costs. So, you can roughly afford up to a $2.25 million dollar property. This leaves you some money for closing costs.

If you know that you have terrible credit, then the lender is going to require more down. They may even ask for 50% down. Now that same $250,000 will only buy you $500,000 in real estate plus closing costs.

Have a lender in mind before you start looking at properties. This can be your agent’s lender or one that you have worked with before. The important thing is to make sure that they answer phone calls or return phone calls, that they will get you the answers that you need, and that they don’t take weeks to respond to questions you needed the answers to last week.

Don’t settle on your lender. Take the time to find someone who sees the vision of what you are trying to do. As always, happy investing.