Investing in commercial real estate can be incredibly lucrative. From flipping houses to creating rental spaces, investment properties can be a significant source of revenue. Real estate does require a lot of capital, though, and not everyone has sufficient savings to cover the start-up costs. That’s where financing comes in. If you’re stepping into the real estate investment business, you’ll need to prepare these five things to land a good loan.
1. Your Investment Property Type
The financing available to you is dependent on what type of commercial real estate you’re investing in and how you plan on using it. For example, there are different loans for businesses that want to flip properties than for those that are planning on turning a space into a rental property. There may even be additional distinctions between renting as a retail space versus a residential space.
2. A Budget
Once you know what you’re planning to buy, you can start figuring out what sorts of terms you could expect. Typically, terms will last between 5 and 20 years. However, if you’re flipping properties, your terms will be even shorter. You’ll have to factor in time, interest rates, and your anticipated profit into your calculations before asking for a loan.
3. A Down Payment
A down payment is often necessary for securing a commercial real estate loan. Some fix-and-flip loans use the property itself as collateral, but that can depend on your lender. Be prepared to set a down payment or use your liquid assets as collateral.
4. A Good Credit Score
Your credit score is very important in this business. Due to the high-risk nature of the real estate, lenders want to know that you are financially responsible. Both your personal and your business credit scores will help lenders determine your eligibility and your interest rates.
5. Business Plan
Investing is a business, and any lender will want to see that you have a plan. You’ll have to explain your business operations, management, and, most importantly, your financial plans. Cash flow is something lenders look at first. In addition, they will want to see that you show exactly how a loan will help your endeavors, including how you plan on paying it back. Don’t just ask for a loan that covers the price of the property. You have to consider the cost of renovations, including materials and manpower, while also leaving a little room for emergencies.
Financing is a necessary step for investing in commercial real estate. Make sure you’re prepared for every step so that you can make the best case for yourself.