No matter which type of lender you are working with, most will prefer that the borrower focus on a property when assessing a loan. This information should include the address and location, purchase price, intended use of structure, amount and scope of work, timeline for rehab, contractor bids and projected after-repair-value (ARV). The more information you can bring to the table, the better, such as drawings and environmental analysis.
The financial information regarding the project includes the rent roll or schedule of leases which basically amounts to the amount of income that can be expected from the property. If the property is under construction, a lender will want to see the general health of the particular market including the area’s vacancy rates and your plan for obtaining tenants. Having pre-leasing in place can be a big checkmark on the “yes” side when trying to obtain a commercial real estate loan.
They will also want to know what type of experience you have and any past investment projects in this specific segment of real estate. Some lenders will check the borrower’s qualifications such as credit history and bank statements. They will want to know your financial situation. Do you have other projects currently in the pipeline? If so, just how much debt are you currently faced with? If you have partners, the lender will want information on them as well. This will be their go-to in case of default.
Other lenders require a pro forma for a commercial real estate loan. This includes the net operating income (NOI). Also known as EBIT or Earnings Before Interest and Taxes, it is, just that, and helps lenders understand what kind of cash flow you’ll be expecting. It equals all revenue from the property minus all operating expenses. The debt-service-coverage ratio (DSCR) is also part of this documentation and is calculated by dividing the Net Operating Income by the Annual Debt Obligation. The internal rate of return and cap rate are the final pieces of the pro forma puzzle. The internal rate of return is the rate of growth a project is expected to generate while the cap rate is the ratio of Net Operating Income to property asset value.
Conventional commercial real estate loans from banks and credit unions must adhere to strict rules and guidelines when it comes to financing an investment. For this reason, they are often more difficult to obtain loans from than one provided by a private hard money lender.
Traditional lenders will need to check your credit score as well as your creditworthiness. Hard money lenders, on the other hand, do not require income verification or credit references. These short-term loans usually fall into the one to three-year mark, though some will issue loans up to 5 years and allow extensions. Some lenders assess a prepayment penalty, usually 1 to 3 percent, while others do not—Important considerations when funding your project. It is much easier to qualify and faster to obtain funding for hard money real estate loans making them the loan of choice for many investors.
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.