15 Oct Investment Property Analysis – Commercial Property Purchase (Continued)
Sourcing the money: Unlike conventional lending, for commercial property purchases you need to source at least 25% for a down payment. In my experiences, most lenders asked for 30-35% down payment in order to secure financing. This was news to me as I was only prepared to put down 20%. I strongly encourage you to work with multiple financing sources and start your process as early as possible, as it can be a lengthy and frustrating one. I began the process by working with a broker, until I learned that the terms, fees, and down payment terms were not in-line with my expectations. This was two weeks into the process when I decided to look for a new source of financing.
After calling over 10 banks, both large, national institutions and local firms, I found out that most either do not lend for commercial purchases, have a minimum of $750,000, or they would only lend to an established business with over $1mm in revenue. At this point, naturally I panicked. Because this was a great property and met my investment requirements, I continued to call lenders until I found someone offering reasonable terms, rates, and fees. The lending requirements and documents gathering process was unlike any other that I’ve seen – and I’ve purchased residential property before as well as refinanced mortgages. Thankfully, I had a great support team behind me and we prepared the full package for the bank in less than a week. At that point, I was informed that the closing process would take 60 days from my initial application date. I was already three weeks into the process at this point.
In purchasing an investment property, the property and inspection portions of the process are very important steps. Normally you would have 2-4 weeks to perform your due diligence and inspect the property. During this time, you should verify all income and expenses that the seller may have supplied you with that you used to perform the investment property analysis. Make sure everything checks out and hire a reputable inspector to inspect the house.
In the end, we were able to close in 45 days – 15 days earlier than expected – with the rest of the process going smoothly. I must reiterate, you can read all the books in the world, but until you take that first step and take action, it’s just words in a book.
Lessons learned during process:
- Hold title to the property in an LLC for liability protection and to maximize your tax benefits. I was lucky for this portion in that I was able to complete this step myself, and can certainly help you setup your own LLC when the time comes. The bank will also require an Operating Agreement which I can also help you with. I created a spreadsheet to keep track of all business deductions separately during the process for easy tax filings, since the property will be filing its own tax return as a separate entity. You can find the business deductions worksheet here for a nominal fee.
- Get mortgage quotes from brokers as well as direct from banks/lenders for best rates, terms, and fees.
- I learned the hard way that all commercial loans have a pre-payment penalty. They vary among lenders therefore it’s important to shop around and ask this question early on in the process before you submit an application.
- Commercial loan terms vary from 3 to 15 year fixed, but are amortized through 25-30 years for lower monthly payments. You will need to refinance at the end of your loan term.
- Enlist a good attorney who has experience closing commercial properties. They need to be experienced in these processes in order to keep them moving along. A lawyer is much better equipped to evaluate the sometimes confounding legal contracts.
- Lease the property and keep it leased. Review the investment property analysis tool to determine which expenses you can decrease and how you can make more money. Remember that raising the CAP rate for your property will increase the value of the property, giving you more built in equity.
- Enjoy positive returns on your money.