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Commercial Loan Blog

March 31, 2014

As it applies to commercial financing and business loans, debt service coverage ratio, or DSCR, is the percentage of the net profit left over after loan payments are made. DSCR is the percentage of the annual debt service, or ADS, (annual principal and interest) of the net operating income (gross rental income minus expenses). The full name for this calculation is Debt Service Coverage Ratio, or DSCR, but in commercial lending this is usually shortened to DSCR. A loan on an apartment building that has a NOI of $146,000 and ADS of $96,500 has a DSCR of 1.51 – or 1.51... more

March 30, 2014

If you are just starting out in commercial real estate and want to function in this world, you need to become fluent in and have an understanding of capitalization rate, also known as cap rate. This is because commercial realtors, commercial appraisers, and commercial lenders all use cap rate to determine the accurate current value of a commercial property. 

Here is the easiest way to comprehend cap rate: Cap rate is simply the rate of return on the value of the property prior to financing. If you are interested in purchasing an apartment building in Dallas,... more

March 29, 2014

What is non-recourse financing? It's a type of financing sometimes available for commercial real estate loans. "Recourse" simply means that the lender is requiring a personal guarantee from the borrowers or key principals on the loan. "Non-recourse" means that no personal guarantee is required. On a recourse loan, should you not be able to make your payments, and if a judicial foreclosure takes place, the lender can go after you personally for the deficiency. Yes, they can obtain a court judgment against you and go after everything you own – your bank and stock... more

March 28, 2014

How do you choose the right apartment or commercial management company? Will your management company run lean and mean for you? Will one of its priorities be that your investment makes a good profit? Will it keep your tenants happy by handling requested repairs and maintenance items quickly and thoroughly? Will it keep the property in pristine condition so that future tenants want to live there and the current tenants are proud to live there?

Let’s start out by realizing that a commercial property is a business. The number one reason businesses fail is due to... more

March 27, 2014

Most community banks borrow money wholesale and sell it to you as an investor in apartment buildings at retail. So how are apartment loan rates determined? Most banks borrow money from other banks or from the Federal Reserve, and almost always on the short term (which means they have to pay it back on the short term). These community banks know their cost of funds and add on a margin of profit.  

Apartment loan rates start with what is called an index, such as U.S. Treasury Yields, the Federal Funds Rate, or Prime Rate. A margin of basis points (each basis... more

March 26, 2014

Another important item to consider when contemplating the rehab of a multi-family property is when and how to schedule a property inspector visit. The visit should be scheduled before signing the purchase contract, if possible. At a minimum, you can have it written into the purchase contract that you have 30 days to have the property inspected. Some sellers will pay for an inspection pro bono, but in most cases you will have to foot the bill for this. A licensed commercial property inspector will write a report detailing all the work that needs to be done, plus the... more

March 25, 2014

Did you know there are big differences between commercial apartment properties and residential investment properties? In some ways it’s like two different planets. The differences are vast.

It's important for you to know the differences. Investors new to commercial apartment properties (also known as multifamily properties) or any kind of commercial properties need to become familiar with the differences between residential investment properties. It's very important to do so before moving into the arena of owning commercial properties.

Before we go into... more

Published March 16, 2014

Rehabbing multifamily apartment properties can be a pretty daunting—not to mention costly and risky—prospect to consider. Is this property rehab-worthy in the first place? If you are purchasing a run-down property, are you getting it for a low-enough price that, in the end, you will not come to the conclusion that you might have been better off demolishing the original structures and rebuilding from scratch? These are questions you may want to ask yourself before beginning any multifamily housing rehab project. 

The reasons multifamily rehab projects... more

Published March 15, 2014 

Unlike most residential mortgages, which are made to the borrower, commercial loans are made to the income of the property, the quality of the property and the borrower. As a consequence, most lenders perceive a greater risk for commercial loans than residential loans, and interest rates will tend to be about a point higher than on a comparable home loan. Ever since the Great Recession, banks have been even harder on prospective borrowers seeking commercial loans, scrutinizing every detail of their businesses and other investment properties. Worried about... more

Published August 5, 2013

Do you need a bridge loan—also known as a hard money loan—instead of a conventional apartment loan to purchase or refinance an apartment building?

Conventional permanent loans, the ones with the best long-term fixed rates, require that the property:

1) Be in good condition.

2) Have 90 percent occupancy for a minimum of 3 to 12 months

3) Have 12 to 24 months of good net operating income (gross income minus expenses).

If you don’t meet the three criteria above, you’ll most likely need a more expensive apartment bridge loan in... more

Published April 1, 2013 

What keeps many experienced investors from qualifying for apartment loans?

This is a continuation of a recent post about the difficulty of qualifying for an apartment loan. Here I’m writing specifically to experienced multifamily investors who have not had apartment loans since the recession hit around 2008.

One point in the previous post was about experienced investors who do not possess enough liquidity to qualify for a high-quality apartment loan. This is such a big problem that I’m going to stress the importance of it.

This is not... more

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