3 Steps to Getting Commercial Real Estate Funding

You have a plan to invest in commercial real estate, but you need financing to make it happen. Owning commercial property can be a significant source of income if tenants are financially stable and there are few vacancies. Shopping malls and office buildings can be successful investments, especially in areas of high growth. There are also risks involved with commercial property, such as clients going out of business or filing for bankruptcy and not paying rent. Banks are as concerned about these possible pitfalls as you are, so when seeking funding for commercial property, be prepared prior to the loan process.

First, you will need to make sure your credit record is strong. Since the credit crisis, banks are less willing to loan large sums of money than they used to be. Some investors use private lenders or fill in the loan gaps with mezzanine lenders, but these private lenders often charge high interest rates. In general, the better your credit history, the more willing banks will be to make the loan. This is the case except with very large loans on major properties. Your personal credit score is a factor when applying for commercial real estate funding. If you have filed bankruptcy in the past decade or have experienced foreclosure, this could be a black mark.

Second, tell your investment story effectively. It helps to have a detailed business plan to show the lender how you plan to use the money and what kind of clients you will have as tenants. Make pro forma calculations to demonstrate what kind of income you can generate as a commercial real estate investor and that you can pay off the debt consistently.

Third, look at the fine print of the loan. Decide what the repayment period you prefer. You may want to keep monthly payments low and agree to a balloon payment of a higher amount at the end. If you can’t afford the final balloon payment, you may be given the option to refinance. Check if the loan requires you to use personal collateral. Think about the risks you are willing to take and if you are prepared to use your personal property to guarantee the loan. Also pay attention to early repayment penalties. You may not be able to pay off the loan in the first two years, and will be subject to a penalty fee if you pay it off following that period. Make sure the terms of the loan are clear before you sign.

SHARE IT:

Leave a Reply