Getting a mortgage for a commercial real estate investment property can be a daunting task. Understanding the commercial loan requirements for different kinds of property loans in itself can be time-consuming. A beginner can lose sight and get lost in this daunting process of finding the right loan.
However, finding the right mortgage for your property is one of the most important steps for long-term benefits. Also, it goes a long way in determining one’s commercial real estate investment success. It is a time-consuming task, yet one of the essential ones. In this blog, we’ll talk about the things you should know before applying for a commercial real estate loan. We’ll answer how to get a commercial loan for a rental property.
As commercial rental property loans are a niche segment of mortgage, many people aren’t aware of the lesser-known facts about rental property loans. Getting a loan is not a stress-free process. Getting a loan for an investment property can, therefore, get even trickier.
However, knowing a fair deal about how things work can put you ahead in the game and save lots of time. It is leg-work, yes. But it needn’t be as confusing or daunting as it seems to be or as is portrayed by your friends or family who struggled with getting a rental mortgage. Let’s dive right in and understand the things you should know before applying for a commercial real estate rental property loan.
#1 – Understand about your lending limits
Different lending institutions have defined different norms on the maximum number of loans one can carry. For example, Fannie Mae allows an investor to take a maximum of 10 credits at a time. Fannie Mae is on the higher extreme of the loan limit, and most lending institutions curb their lending limits to a maximum of 6 to 8 loans.
The interesting point about this option is that if you’re working the right lender, they can help you choose an optimal portfolio of investments that will let you leverage the best by the maximum loan amount limit.
A right mix of both short-term and long-term loans can be worked out to ensure your out-of-pocket expenses are at a minimal, at least during the initial stages of your loan repayment. Further on, it is worth noting that bigger banks and other traditional lending institutions have lending limits to as less as four loans. Thus, finding out what lending institutions are willing to go up to the level of 6 or more credits is important and might need some leg work.
Before you do that, consult a real estate advisor to work out if you’ll need more than 3 or 4 loans in the first place. How many loans you’d require, and what kind of loans is a question you need to answer by keeping your specific needs and requirements in mind? Thus, working with an expert commercial real estate advisor is highly recommended.
#2 – Choose the right lender for you, right from the get-go
The importance of choosing the right lender cannot be stressed enough. Primarily when you are investing in a portfolio of rental properties, choosing the right team to work with is very important, and your lending partner is the most significant part of this team. You cannot choose the right lender to fund your commercial real estate property needs, right from the very beginning.
Many beginner investors choose to work with less-experienced brokers who charge lesser fees. That is a big mistake that will put your real estate investment success in jeopardy and cost you a lot of failed deals. Even when you choose to work with a broker whose experience is limited, working with someone who duly understands the investment landscape is of primary importance.
Never choose an advisor or a broker purely based on their fees. Good experience and expertise are what you lack yourself, and these are the minimal requirements for your advisor or broker.
Bottom line: Save yourself a lot of bad advice and a bunch of deals-gone-wrong by choosing to work with the right lender, right from the very beginning. Although you might incur larger initial upfront expenses, it’ll pay you in the long run, and have found the right lending partner will put you way ahead in your rental investment business.
Understand that when you invest in a bunch of rental properties, your mortgage needs will rarely end at the very beginning of buying the property. More often than not, your mortgage needs tend to increase over time for repairs and renovations, advertisement expenses, etc. Thus, choosing the right fit of a lender will pay off consistently throughout your investing.
Good advice will be to work with direct lenders without any middlemen. The reason? You’ll be having more control over all your decisions since you’re directly in touch with the actual decision-makers. You can understand what works and what does not much easier, and your dependency on someone else’s decisions will lower, which is an excellent thing for you.
Thus, unless you’re looking at your rental property investments as a tiny part of your investment portfolio and don’t have time to spare to work directly with your lenders, you are better off working with direct lenders right from the very beginning.
#3 – It counts to have sufficient cash reserves
You will still need to have lots of cash reserves, especially when investing in a diversified rental property portfolio. Paying your down payment is the first reason why. Additionally, lenders will need you to have a minimum of 4 to 6 months of cash reserves that you’ve saved for each of your rental properties.
If you own a primary residence where you live and are thinking of investing in a new rental, you should typically have six months of the mortgage payment for both your existing residence and the prospective rental property you have in your mind. Thus, it’s important to work out how much savings you will need to set aside every month to cover up for your cash reserves.
#4 – The more loans you take, the stricter the credit requirements get
Just because there’s a good lending limit imposed by your preferred lender or lending institution, it does not mean that you’re free from fulfilling your minimum credit requirements. The fact is that your credit requirements grow stricter and stricter as you take more loans. The reason is simple – Your lender wants to be assured of your loan repayment capabilities. Thus, the credit score that you need to have is higher.
For example, let’s consider Fannie Mae. They have a lending limit of up to ten loans. For the first four loans, their credit requirement is an average credit score of 630. As you cross this limit of 4 loans, your credit score requirements will be on the rise. If you want the fifth loan, you will need a credit score of 720 and above.
Put simply, you should be very prompt with your loan repayments every month and maintain a good credit score throughout your loan tenure. Additionally, it pays to also work towards increasing your credit score over time and gradually, to qualify for better and bigger loans as you climb upwards in your investment journey. It is a gradual process, but many investors have done this and built a large portfolio of rental investment properties.
#5 – The more loans you take, the more upfront costs you’ll need to pay
The upfront costs you’ll need to pay in the form of down payments will also increase over time, as and when you’re closing on your lending limits. Just like the credit requirements start shooting up, your upfront costs get heavier too. For example: Let’s say that you paid an upfront cost of 20% as a down payment for the first loan. When you scale up and want to avail of your fifth or sixth loan, your upfront cost will be 25%.
Banks or lenders try to ensure that you have enough to cover up for the down payment of the loan, and the impending loan requirements. They want to ensure that you have real increasing needs for your rental property mortgage and are not trying to get more loans just because you can.
Getting commercial real estate loans can go wrong if you make poor decisions. These have the power of making or breaking your commercial real estate property investment success. While rushing through is not an option, taking very long time is not good for you either. Finding the sweet spot between sweating out the journey of finding the perfect commercial mortgage and doing it as efficiently as possible must be the goal.
Keep in mind all the points discussed above before you go on a lookout for your rental property’s best commercial lender.