For loan amounts up to $1.5MM on commercial properties, we can get the Loan-to-Value (LTV) as high as 90% in some cases regardless of the property's cash flow. So even if the borrower made an extra million dollars a year, traditional lenders wouldn't increase a commercial loan amount past their guidelines.
It was hot and dusty in the wide open street. The steely-eyed man with the badge standing in front of the small retail center was perfectly still, totally focused on the bank underwriter who had stopped his scribbling on the yellow pad. The underwriter looked scared ... very scared as the Sheriff said: "Put the pen down, pahdner ... and put it down real slow-like.
"OK ... so it's a bit dramatic.
But there is a new class of lender in the small commercial loan market, one that I call "Hybrid Lenders." For loan amounts up to $1.5MM on commercial properties, we can get the Loan-to-Value (LTV) as high as 90% in some cases regardless of the property's cash flow.
For those of you who have been in the business for a while, you might be somewhat shocked at that statement.
But there may be some of you who are thinking:
"Big deal, Higdon. I can get that and even better on my home!"That's true.
But then you probably don't know that until recently, most lenders in commercial real estate based their loan amounts on the property's ability to pay the loan payments without regard to how much the buyer made.
So even if the borrower made an extra million dollars a year, traditional lenders wouldn't increase a commercial loan amount past their guidelines.
On top of that, you'd usually see a maximum LTV of 75% on most commercial properties, with 80% being the top on apartments.
So what changed?These new lenders blend commercial underwriting with residential.
They look at the whole picture when considering "free" cash flow and the borrower's ability to pay the payments on the loan.
They also require full recourse, meaning that they'll come after the borrower's other assets in the event of non-payment, and they charge more in rate.
The good news in all of this is that you can get into commercial real estate with far less capital than you have in previous years..
Where Have all the Commercial Lenders Gone?
Government Agency guaranteed or sponsored transactions, including: SBA 7(a) and 504, HUD construction loans for multifamily projects, Community Reinvestment Act loans, USDA Business and Industry loans, and to a lesser extent, Fannie Mae and Freddie Mac multifamily loans.Trading Up Using the 1031 Exchange
A powerful method for building real estate holdings is the use of 1031 Exchanges, which lets investors defer capital-gains assessment on investment property.Segregate Costs for Better Cash Flow
While costs such as office equipment and furniture are easily recognizable as personal property, construction-related costs that are often included as part of real property may also qualify.