Commercial Real Estate Financing for Beginners

Securing commercial real estate financing can be a difficult task if you're not familiar with the field. First, let's distinguish between residential and commercial. Residential properties are solely for housing people. The location can have up to four units. Five or more units, and just about anything not intended for habitation, qualifies as commercial.

With that clear, let's discuss the actual financing. Acquiring money, and how much you are allowed to borrow, is affected by a number of factors.

When analyzing an investment plan, lenders consider the following:
* The borrower's credit rating
* The net income of the venture
* The laws and demographics of the area
* The kind and number of tenants.

These are not the only things lenders consider, but these can give you an idea of how much planning and research you need to do. We'll address these as the most immediate concerns that you can also investigate on your own.

Commercials all over television talk about a person's credit rating. This very important number controls your financing life and future. Basically, the higher the rating, the more likely lenders are to give you a larger loan with a decent interest rate. For them, a good rating indicates not only your ability to pay, but your level of responsibility to your debtors. If you have a median rating, you may have to begin with a smaller venture so that you can get a reasonable loan and interest rate.

In addition to the credit rating, but far more important a consideration in commercial property, is the net income of the venture. Financiers want to see that the venture will allow you to pay the mortgage due each month. A proposal that does not clearly indicate profits enough to cover expenses and loan payments is not likely to receive funds. It is important that you investigate this before proposing a venture to a lender. Make sure you account for all of the expenses (repairs, maintenance, etc.) before presenting your net income on the property.

Consider the laws and demographics of the area because the finance agency will. If laws are going to restrict the productivity of your venture, lenders may be reluctant to provide a loan. The same is true of demographics and the economic climate of the location. If the population is low or isn't likely to patronize your business, again, that can effect whether or not you get funding. Also, the economic activity of the area influences financial decisions. If there is a boom, your chances increase. Let's say the area is a money drain, or in an escalating slump. It will be harder to justify commercial real estate financing in those kinds of conditions.

Also look at your tenants. For example, if you're proposing to open a health food store in a strip property that has several fast food tenants, then your business's chances of success are much lower. If, for instance, you open the same kind of store in a strip with a gym, yoga studio and health spa as tenants, the likelihood of getting frequent customers is increased. Lending institutions take these sorts of things into consideration because they influence the profitability of your venture.

These are not the only considerations, but they are easy to check into and can help you decide if a particular venture is worth your time and the work involved in securing commercial real estate financing. Make sure you do your homework first, and securing funds for your venture will be an easier process.

Commercial Real Estate Financing Basics

Applying for commercial real estate financing is a big step. It's not easy to get commercial property loans, especially if you are a first-time borrower. Before you apply, there are some things you should think about in order to be fully prepared.

Commercial real estate financing is different from residential real estate in a big way, according to the lender. With residential real estate, they are looking at how much the property is worth, and not overly concerned with how much it will make in the future. Residential property generally appreciates over time. With commercial real estate, however, they'll be looking at future profits.

This means that they will be concerned less with the current worth, and more with the possible worth. As a result of this, they will be very concerned with what sort of profits the venture will generate. This is why it is very important for you to sit down and do the math. How much do you think it will make?

This means also that you should be clear on how you will use the property. What kind of business will this be? Is it going to be all for one business, or are you going to rent out units? These will be major considerations for the lender, so make sure you have a detailed plan all set out.

The actual geography of the property will also be a factor in determining whether you get your loan or not. Look at the location of the property and how that will effect the business. You will have more trouble getting financing for a place located way out in the sticks than a place on a highway off-ramp.

The size and type of the property will also be factors. You will want to look at the history of the place and make sure there aren't any minor details that might cause trouble, like environmental problems.

Risk is the most important consideration to lenders. They will be looking at the future of the venture and, in particular, at possible things that could go wrong with the business.

A big part of this is the condition of the overall market. You can save yourself trouble later with your commercial real estate financing by studying the market and understanding its current trends. This is what your potential lender will be looking at, so it's good for you to understand it as well. If the future is uncertain for the type of property you are trying to buy, they may be worried about making back the loan.

Before the deal closes, they will send you a "commitment letter." This is a notification from the lender letting you know officially that you have been approved. More importantly for the lender, the commitment letter will have the terms and conditions of the loan. In other words, these are the rules.

It will tell you details about the closing conditions, rules for what you can and can't do with the property, as well as a summary of all the terms you agreed on, making it official. Take a good look at this and make sure that it will not prohibit you from doing the things you intended when you requested the financing.

Finding commercial real estate financing is a long and drawn-out process, but if you can consider a few things before you apply, you can save yourself the headache of dealing with something unexpected later.