All Forum Posts by: John Acheson

@John Acheson - the interest rate you pay is going to be a concept of the prevailing rate for the market, the type of loan product you take out (shorter term loans usually mean better rates), your personal credit, your track record, and another host of factors that vary from lender to lender. The NOI of a property (and other factors: condition, location, etc.) will determine if you will even GET a loan. Your creditworthiness and of the other factors I named above determined how good the rates and terms of that loan will be for you.

When I'm personally budgeting numbers for a commercial loan for clients, I typically go between 5% and 6% interest over a 20YR term.  This is just what is typical in my market based on most of the clients I work with... reaching out to local lenders will help you get an idea of what you can expect to pay.  You can run your financial situation by a few lenders to see if they're okay with at a preliminary level, lending you money... but unlike residential, very few commercial lenders issue the popular "pre-approval" letter... because once again, they qualify the property first and the borrower second.  And they don't have all of the information they need up front on a property... that's what due diligence is for once you go under contract on the property you intend to buy.  

Unless you're a long-time customer or a very attractive borrower (maybe a well-established investor that has dozens of properties under ownership), you probably won't even know what the exact interest rate is until several weeks into a deal.

@John Acheson The difference between residential and commercial lending is generally a residential lender wants to make sure YOU qualify first and then that the property meets their criteria... whereas with commercial lending they want to make sure the property qualifies first and then you do.  Now both steps are important, its just a matter of how they evaluate each file that comes across their desk.

If for example, you're looking at an 8 unit building for $500K and you want to put 25% down on the property... well the building had better meet their 1.25 DSCR number first. It doesn't matter if your PERSONAL income is $50K/yr or $500K/yr, if that building doesn't have a NOI that meets their DSCR, they won't loan you all the money you're looking for.

At this stage of the game, there really isn't any substantial benefit to you having an LLC that's borrowing money with a non-recourse loan... because they still will take into account the LLC's track record when it comes to property acquisitions. If it hasn't done any deals... it doesn't matter if its been around 10 days or 10 years, they won't lend the money without a personal guarantee.

I'd look into having a discussion with a local commercial lender that can talk you through the process. Yes, you'll need to make a certain personal income, but more importantly, your deal needs to make a solid NOI and you need to have enough cash to put down to buy a property.

@John Acheson this article sounds like the picture perfect borrower for a lender... but doesn't paint an entirely accurate picture. You don't need a "seasoned" entity to purchase real estate with commercial financing. In fact, investors form new entities all the time right before purchasing a property. The difference here might be if you're considering recourse versus non-recourse financing. Unless you have an existing entity with a solid set of financials (i.e. you own a landscaping business that is looking to purchase a commercial building or you own an entity that already holds several properties), the majority of these commercial loans are going to need to be personally guaranteed by you anyway. You can buy it in ABC, LLC... but the mortgage docs will have you on the line if they have to foreclose on the property because you didn't make your mortgage payments.

When you're dealing with purchasing commercial properties, yes some of those different reports may be requested, but depending on the size of the property you're looking to purchase, they might not be relevant or necessary.  If you're looking at acquiring a mixed-use, 30 unit building for $3M then yeah... they'll require a full commercial appraisal, an environmental report (might not need a Phase 1 here depending on what a quicker environmental survey brings up), and the others are fairly standard for a commercial or residential purchase.  

The bank will most likely require the deal to be underwritten at a specific DSCR (usually 1.25 or higher as @Dennis Wasilewski mentioned). Banks want to make sure they get paid... and they don't want the deal to be too risky. In that example, your total NOI (so after all of your expenses should have been subtracted EXCLUDING your mortgage) should be no less than 1.25 times your annual mortgage payment. So to break that down... if your property has a NOI of $125K/yr, your mortgage payment can be no more than $100K/yr or (usually) 75% LTV (which breaks down to roughly $8,300/mo... or approximately a $1.6M property depending on terms).

There's a lot of differences between residential and commercial lending... but I promise they're not too complicated and your lender will be there to work with you and get you to the finish line.  Let me know if you have specific questions though!  Always happy to answer!  

I misspoke! I knew something sounded off. It was a debt service coverage ratio of 1.25. That is calculated as:

Debt Service Coverage Ratio = Net Operating Income / Annual Debt Service

The property will be titled under the LLC only. This is a long term buy & hold but I will just refinance it commercially as-needed. When I go to sell it would be just like any other commercial sale... I'm buying it from a LLC now.

This would have been more about the LLC if it had been operating for two years but I'd still be guaranteeing it even then.

Working it out now as a lot of options. Could be 5, 7 or 10 year term with variable or fixed rate & 20 year amortization/balloon. Another option is 20 year term with 5 year fix & variable after that. Rates prob be 5.5-7%, depending what type of option.

Sure thing...

- 6-unit apartment building
- 25% down & any seller assist could cover closing costs but not my DP
- the rents had to be 1.25x of debt service & given 1st deal they wanted to see that I could cover the mortgage, insurance and taxes personally... I don't know what DTI they were looking for but I was well below 40% with this mortgage payment
- LLC debt would have mattered if I had one stood up with debts.
- Yes it could be a single-member LLC. I am 51/49 with my wife.
- I recommend finding a credit union that lends commercially, within the region that your property is in. Odds are they will do smaller deals and work with newer investors, given the community/member focus.

Depends on the size of your commercial loan. I'm approved for a $150k commercial loan on a MF based on my personal credit & assets as well as the property. I just went through the process today to form the LLC and it won't really exist for another 3-4 weeks.