Preparation for a Commercial Real Estate Loan
Residential real estate investing is significantly different from commercial real estate investing. Though there are some similar aspects, they are different areas of investment and are treated as different. That is why it is necessary to prepare differently for seeking a loan for commercial real estate in comparison to residential real estate.
Credit scores. Though credit scores are a primary factor in residential mortgages, they are significantly less important in commercial real estate investment. They are used in the application process, but they carry little weight in the overall application approval.
Net worth. Your net worth does carry weight in commercial real estate investing. In fact, it is often the first factor examined by lenders. Typically, lenders want to see a net worth at least equal to the loan amount. This provides some assurance that the loan will be repaid.
Income. Along with your personal income, whether you are self-employed or work in a traditional setting, your income examination will include an analysis of any other properties you own and how they have fared in the market.
Liquidity. Liquidity is important to lenders because it shows your ability to repay the loan. For example, if you use all your liquidity for the down payment, you will have no more cash. This can be a negative factor according to lenders.
Experience. Finally, lenders will look at your ownership and management experience. This shows that you are equipped to handle the responsibilities that come with the investment for which you are seeking the loan. As a result, lenders will have a better idea about whether you will be successful in your investment.
Whether you are interested in real estate investing (commercial or residential) or you are making a shift from residential to commercial, it is important to understand the way different factors are examined in the application process. With this understanding, you will have a better foundation for getting the loan you need to achieve your commercial real estate investment goals.