COMMERCIAL FINANCING – YOUR FIRST DEAL
Congratulations! You’ve successfully navigated the initial steps of real estate investing by finding a deal and having your Letter of Intent (LOI) accepted. Now, the next crucial step is to figure out your capital stack and secure financing for your multifamily property investment. Financing commercial properties, particularly multifamily properties with over five units, differs significantly from financing a single-family home. Let’s delve into the nuances of commercial financing and how you can navigate this process effectively.
Understanding Commercial Financing
When it comes to financing multifamily properties, several key differences set commercial loans apart from residential mortgages. First and foremost, commercial loans typically come with higher interest rates compared to residential mortgages. Additionally, the amortization period for commercial loans is often shorter, meaning borrowers have a shorter timeframe to pay off the loan. Moreover, commercial loans often include a ‘term,’ indicating that the loan is due in full at the end of a specified period, requiring a balloon payment.
Choosing the Right Lender
For smaller loan amounts, typically under $1 million, local banks and credit unions can be excellent options for commercial financing. These institutions are often eager to support their local community and view portfolio loans, such as multifamily property financing, as a reliable revenue source.
Challenges for Out-of-State Investors
However, if you’re an out-of-state investor seeking financing from a local bank or credit union, you may encounter some challenges. Building strong relationships with local lenders is crucial, and this can be challenging when you’re not physically present in the community.
Leveraging Relationships
One effective strategy for out-of-state investors is to leverage local relationships, particularly those with your property manager. If you haven’t already hired a property manager, now is the time to start interviewing and selecting one. Look for a property manager who not only has experience managing multifamily properties but also has a vested interest in real estate investment.
Once you’ve narrowed down your list of potential property managers, ask them for recommendations for local lenders they have worked with in the past. Property managers often have established relationships with local banks and credit unions for their operating accounts or personal investments. By leveraging your property manager’s connections, you can gain introductions to lenders who may be more receptive to financing your out-of-state investment.
Conclusion
Securing financing for your first commercial multifamily property deal can be a daunting task, especially as an out-of-state investor. However, by understanding the nuances of commercial financing, building relationships with local lenders, and leveraging your property manager’s connections, you can increase your chances of securing favorable financing terms for your investment. Remember, establishing strong relationships and demonstrating your commitment to the local community are key factors in convincing lenders to support your investment venture.
