Investing in commercial real estate requires knowledge of this type of property as well as some startup capital which is the money required for an expense. You can obtain a commercial real estate loan from a bank or an alternative investor. Investing in a commercial property will reap countless benefits that residential real estate does not. As an investor, you will enjoy the additional cash flow and bigger payoff than with commercial real estate. In order to recognize the best commercial real estate loans deal, there are a few key steps to take include making a plan of action, learning how to think like a professional, and seeking out motivated sellers.
Most loan applications require personal financial statements as well as personal tax returns for up to two years prior to applying. To acquire a good deal on a CRE loan, it is important to educate yourself on the topic, make a business plan to present to the lender, search for motivated sellers, and be adaptable. Having a good credit score will also improve your chances of getting approved.
Creating an action plan will increase your chances of getting approved for commercial real estate loans. Knowing how much you can afford and are willing to pay will help with choosing what and where to purchase from. Thinking like a professional will also be beneficial as an investor because it opens doors to the opportunity of greater cash flow and ways to become a more successful investor overall. Lastly, seeking out motivated sellers that are willing to sell below market value is key. This is often brought on by a desire to sell as soon as possible. When a seller is eagerly waiting to get their property sold, they will be less likely to negotiate and more likely to sell below market value.
Borrowers with lower LTVs, loan-to-value ratios, often have preferred financing rates as opposed to those with higher LTVs. This is because the more equity you have, or stake in the property, the more likely the lender will be to approve your commercial real estate loans. Another important ratio is the debt service coverage ratio (DSCR) which measure how much potential income your property can generate against your debt payments. It is calculated by dividing the annual net operating income by the total annual debt payments. Lenders prefer to see a DSCR of 1.25 or higher.
As an investor, understanding commercial real estate loans and how to find a good deal is imperative. Making a plan, thinking like a professional, and seeking out eager sellers are three key strategies. Investing in commercial real estate can be an effective way to increase your cash flow.