Buying my 1st Commercial Property
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[{"id": "fcck9b3", "text": "Hire a broker and pay them.", "replies": [], "depth": 1}, {"id": "fccvdwv", "text": "Commercial loans usually require 30-35% as long as those properties are currently cash flow positive. One of the worst things you can do is to buy a property that you cannot afford. I recommend either saving more money, getting a business partner that can help cover the rest of the down payment, or look for a cheaper property.", "replies": [{"id": "fce3fbp", "text": "Good to know, thanks. Saving 10-15% more is no problem, prefer not to have a partner and complicate things.\n\nBy commercial loan, do you mean starting a real estate investment company, then taking out a commercial loan via that company?", "replies": [], "depth": 2}, {"id": "fcg344j", "text": "Not sure what lenders your using but 30-35% is wrong", "replies": [], "depth": 2}, {"id": "fcgicl3", "text": "Completely wrong on the down payment.", "replies": [], "depth": 2}, {"id": "fcgmaf8", "text": "Yea that sounds outrageous. The down payment also has lots of factors. I recently worked with a guy who bought a 1.2M property and only put down  10%.", "replies": [{"id": "fci7ce7", "text": "I purchased a commercial property and used the BDC as the lender. I only had to put down 10%. I shopped around to other banks and they all wanted 25% down. I opted for the 10% and held the other funds incase of incidentals.", "replies": [{"id": "fdo4af7", "text": "&gt;I purchased a commercial property and used the BDC as the lender. I only had to put down 10%. I shopped around to other banks and they all wanted 25% down. I opted for the 10% and held the other funds incase of incidentals.\n\nu/jpcan26 where are these lenders that only need 10% down?  can you pm me referrals to national or Northeast lenders?  Thanks", "replies": [{"id": "fdp1xth", "text": "Sorry, I should mention this is in Canada.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "fdo47cl", "text": "u/Strivebetter where are these lenders that only need 10% down?  can you give any links to national or Northeast based lenders?  Thanks", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fccwr7s", "text": "SBA usually requires your business to occupy no less then 51% of the building for an income producing business, and cannot be used for (purely) investment purposes.", "replies": [{"id": "fcdhjvu", "text": "Correct!", "replies": [], "depth": 2}, {"id": "fce34oj", "text": "Thanks, guess that\u2019s out of the picture. This is purely for investment.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fcfd9dr", "text": "Why not go to a bank to get a CRE mortgage? Many national and community banks will lend you money. They will run the numbers which will help you understand if your deal is profitable enough. Although you should already have a good idea as to the profitability of the property. You will likely need the rent roll and possibly tax returns of the property.", "replies": [{"id": "fciu9ij", "text": "Thanks, so new to this, didn\u2019t even know about it. Why are CRE interest rates so high compared to say a personal mortgage?", "replies": [{"id": "fcj2nva", "text": "CRE loan rates shouldnt be more than 1% higher than personal home mortgage rates. I guess that could depend on the area you live in. Any big bank like US Bank or PNC should be able to quote you rates. Many smaller community banks have CRE lending as well. Shop around. Sometimes banks will charge 1% of the loan amount as a fee for them to make you the loan.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fcgori3", "text": "If you haven\u2019t spoken with a lender about your buying ability, do that first.   Different lenders may have different requirements based upon the property type (office, industrial, medical), the in place income, vacancy (if any), and location.    Additionally you may want to look at how a property is going to cash flow for you at a lower downpayment.   Most investors I know like to put 40% down.", "replies": [], "depth": 1}, {"id": "fci4u00", "text": "I\u2019m a commercial mortgage broker. Agree with other comments, speak to brokers/lenders about what the property can support in terms of a mortgage. The mortgage is sized off of BOTH cash flow and value not just one. By just assuming you\u2019ll get 80% LTV you can be in for an unpleasant surprise. Additionally, the lenders will consider your credit history, global cash flow, net worth and liquidity on top of property level cash flow and value. The bank will order an appraisal to derive value, if this comes in lower than your purchase price then the bank will use the lesser of the two numbers. If the property has no cash flow you will likely not qualify for a bank loan and will need a bridge loan. DM me if you want more info I can do this for days. Depending on what market this is, different banks have different LTV requirements. Just because one guy got 90% LTV does not make that the norm and in fact this is extremely high and I suspect there\u2019s way more context and story to that. \n\n$750k-$800k is small for me but I\u2019d be happy to introduce you to some national level lenders that lend to first time borrowers. \n\nCorrect, SBA is for owner occupied properties only. \n\nYou should 100% speak to an attorney to create an LLC to buy the property for tax and liability purposes. In fact, some lenders will require this. \n\nAdditionally, don\u2019t forget to calculate closing costs as these will have to get paid out of pocket. Typical closing costs are mortgage recording tax, borrower and lender attorney fees, bank origination fees, broker fees, title insurance fees, transfer tax, etc. For an &lt;$1mm loan plan for 5%-10% of the loan amount but will likely be on the lower end depending on the municipality level taxes, bank and attorney fees.", "replies": [{"id": "fciunzb", "text": "Thank you, that\u2019s very insightful. I can put down an extra 10-15% using other funds, and have closing costs/title fees/escrow fees, etc put away.\n\nSo if I set up an LLC, which would have zero history, I can still get a commercial mortgage? \n\nThese CRE loans seem to have very high interest rate. Any reason for this?\n\nMy personal home loan was &lt;3.5% for a $1M home. Why wouldn\u2019t I take out a personal loan/mortgage? I don\u2019t see the point in paying 7-8%, seems silly.", "replies": [{"id": "fciv955", "text": "You can but then your personal home is the collateral for a commercial real estate (fairly risky) investment. You don\u2019t want to cross things two things together. Most LLCs have no history for acquisitions because they\u2019re formed during the contract period of the acquisition. \n\nIf an interest rate is too high the price you pay should be low enough so that your cash on cash return is still sufficient to you for the risk. In other words, if your cash flow isn\u2019t high enough because of a high rate loan then just pay less. \n\nNot sure where you got the rates from, your loan rates if all is good should have a rate of 5%-7% depending on the market. The amortization is the next thing to focus on after rate. You\u2019d want a loan with as much years amortization (30 is the highest for CRE).", "replies": [{"id": "fck1kvu", "text": "Thanks, perhaps I do need to shop around more for rates. I\u2019m in California. \n\nYes, I\u2019d like as long of an amortization as possible. And no early payoff fees. \n\nI still feel like 5-7 is high, i can get a $1M personal home mortgage at 3.5%. The area I\u2019m looking at has very low vacancy and a growing population, so I almost don\u2019t mind footing the bill for the interest rate discount. Except, I don\u2019t think my bank will let me use a home mortgage for CRE, although they\u2019re the same price...", "replies": [{"id": "fcmls8k", "text": "listen to u/deltahigh . CRE interest rates are at cycle lows right now. The only commercial  assets that are getting sub 3.5% interest rates are class B+/A stabilized assets in at least decently strong markets. upper 5's-7% is where I see this deal trading at as well (not knowing anything else). Youre also not gettin 80% LTV realistically\n\nwhats the cash flow look like?", "replies": [{"id": "fcnfjpr", "text": "Thanks u/bill_ponderosa69. Love the handle name. You nailed it, two weeks ago I closed a 20 unit multifamily refinance in Manhattan at 3.5% for a 7 year fixed rate term. Loan amount was several million so it had scale too.", "replies": [{"id": "fcpgvtj", "text": "When you say 7 year fixed rate term, is the rate fixed or 7 years then variable afterwards?", "replies": [{"id": "fcs1w5t", "text": "The one in question was a 7 year balloon where the loan matures at the end of month 84 and you need to refinance or sell to repay the loan. \n\nMost lenders are offering ARMs where it could be consecutive terms of fixed rate periods to buy you more time until a forced capital event. These look like 5+5, 7+3, 7+5, etc. At the end of the first fixed rate period, if you opt to exercise your option, the loan\u2019s rate will adjust based on a prenegotiated spread over an index. \n\nI always tell clients to explore refinancing before blindly rolling the loan over because a better rate may be available and the prepayment schedules mirror the term offered. In other words, in the 5+5 option the PPP will be 54321-54321 and if negotiated well, the lender should offer you 2 - 3 months at the end of the first period (months 58-60) where the PPP is 0% offering you no penalty to leave and find another loan/lender.", "replies": [{"id": "fct9zzw", "text": "That\u2019s very interesting, thanks for the interesting background info.\n\nSorry is PPP the interest rate of the loan? \n\nI understand the borrower has the option to refinance, but wouldn\u2019t they incur refinancing fees again? I can see why a broker may want to encourage this, as it would be another transaction, but do you see this beneficial to the borrower more often than not? Especially when rates are at record lows like now, I\u2019d probably want as long of a term as possible, fixed rate? \n\nAre most CRE loans structured like this, (5+5, 7+3, etc.) vs a 30 yr loan like personal home loans?", "replies": [{"id": "fctydos", "text": "PPP is prepayment penalty. I don\u2019t encourage them to refinance unless is economically beneficial. A new loan from a more aggressive lender can offer new things to compel someone to refinance a loan early such as a better rate, interest only periods, more flexible PPP schedules, lighter recourse provisions etc. CRE loans are much much much more layered with things to consider compared to a 30 year fixed rate home loan where you just look at rate. \n\nWhen lender A originates loan A on a 5+5 they\u2019ll say \u201crate during adjustment period to reset to 5 year CMT (aka treasury) + 2.25%. The 2.25% is their spread or desired profit margin when they originated loan A but this spread is locked in when you signed the loan docs and tricky time change mid-loan. Maybe they were the most aggressive at that time or spreads came down and lender B is offering a spread of 2.00% for another 5+5 or 2.25% for a 7 year term offering you 2 more years of fixed rate protection (which could be priceless in a rising rate environment). All I\u2019m saying is to review your options. \n\nYes mostly CRE loans come in 3, 5, 7, 10 year periods with 20, 25, and 30 year amortization periods. There are some lenders who try and standout fo offer 12, 15, and 20 year fixed periods and one gov\u2019t program even offers a 35 year loan with 35 years amortization and only a 10-1 step down prepayment schedule. Each lender does something a little bit different which is why I have an industry of professionals to digest this and create markets amongst the lenders for each one of my clients\u2019 unique opportunities.", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fcozc2s", "text": "Make sure to dig thoroughly into the zoning of whatever property you target. Put a zoning verification contingency in the contract.   In my area, an administrative permit is necessary for vehicle repair in almost every zoning district, even the industrial areas.", "replies": [], "depth": 1}, {"id": "fcwafik", "text": "Check out this video with 8 red flags on things to watch out for and not buy a property. \n\nhttps://youtu.be/yWMfWyVICNY[8 reasons not to buy an apt complex ](https://youtu.be/yWMfWyVICNY)", "replies": [], "depth": 1}, {"id": "fcwma18", "text": "Commercial lender here. 20% minimum down or whatever is needed to get to DSCR of 1.25. I don\u2019t charge loan fees for redditors, you just pay appraisal and title costs. 5/25 rate today is 3.85%. Pm me if you\u2019re interested", "replies": [], "depth": 1}]