Commercial loan are often a major funding source for many real estate investors. These types of loans can really help your real estate business develop and grow.
Newer real estate investors may not be completely familiar with commercial loans or how to acquire them. In this post, I want to briefly describe what a commercial loan is, why they are important for investors to use, and how to go about acquiring them.
Conventional loans are the more ordinary, everyday types of loans that one applies for when purchasing a personal residence. A conventional loan is the traditional home mortgage. They can be acquired at almost any bank or credit union or through a mortgage broker.
However, the bank, credit union, or broker that originates a loan of this type does not hold on to them. That is, they do not keep them and collect the interest and payments. Instead, they sell them to the secondary loan market to large institutions, such as Freddie Mae or Fannie Mac.
Commercial loans, on the other hand awhile still likely originating from a bank or credit union are not sold. They are instead held in the bank or credit union's loan portfolio. They are, in a sense, their bread and butter. These institutions make much of their money from the interest and fees these commercial loans bring in.
Conventional loans can get a real estate investor’s career started, but they will not take them to the next level. The reasons for this are the qualifications secondary buyers put in place to acquire these loans.
Conventional loans, for example, cannot be used for a commercial building. A borrower also cannot have more than a few conventional loans in their name. Plus, it is unlikely you can get a conventional loan through your business or LLC.
Thus, if you want to acquire more than a few properties, if those properties include apartments or other commercial investments, and if you want them titled in your LLC, you are going to have to move toward commercial loans. Conventional loans just will not fit what you want to do.
Seeking out commercial loans is therefore a logical step in many real estate investors’ careers. The process of finding and acquiring commercial loans is not overly difficult, but it does take some work and effort on the investor’s part. If you have never sought commercial loans before, here are seven steps to help you.
Think about what it is that you intend to do with the money. Are you a buy and hold investor? Will you flip homes? Both? What are your business plans and goals?
Succinctly outline your business plans and goals in a few paragraphs. Yes, write them down so they can be quickly read by or discussed with a potential lender.
Any potential lender is going to assess the risk in loaning money to you and your business. One way they assess that risk is by examining how you handle your personal finances. If your personal finances are not in the best of shape, take some time now and clean them up.
A personal financial statement is an expose of your financial life, and it will be necessary. If you have never completed a personal financial statement before, understand that they can be real eye-openers. They can help point you toward areas you might need to clean up or otherwise focus on in your financial life.
Every potential lender will want to see at least the last two years of tax returns. Get those forms (federal and state) together now and make copies. Better yet, scan them to create digital files.
These two items help inform a lender about who you are and the real estate connections you have made. Include any real estate-related experience, jobs, and education you might have. List the references of people who help in your real estate career, such as your attorney or CPA. (Just give these folks a head up first and make sure they will say something positive.)
Part of your job in seeking commercial loans is to make it easy for the lender to say yes. Lenders will want to see the documents I have mentioned above and perhaps more. Put all the documents together in one place, perhaps on paper in a folder, which you can hand to them. Or maybe even in a Dropbox link you can send to them.
Doing so will help demonstrate to the lender that you are organized, serious, and a good risk to take.
Seek out the VP of commercial lending at smaller, community banks. Do not bother with the big boys, such as Bank of America or Suntrust at this stage. Rather, look for three or four local banks and give them a call.