How many types of commercial real estate (CRE) properties are there?
Probably too many to count if you are also taking “specialty-use” properties into consideration. However, some of the major property types are: multifamily, retail, office, industrial, and hospitality.
What is the difference between residential and commercial real estate?
Residential real estate is a free-standing home or any multifamily property with 4 units or less and is zoned by the county as a residential property. A commercial property is any property that has a commercial businesses as tenants or a multifamily with 5 or more units and is zoned by the county as a commercial property.
What is the difference between investment and owner-occupied properties?
Investment properties, as the name suggests, are purchased for current or future cash-flow opportunities and the tenants are people or businesses unassociated with the owner. In owner-occupied properties, the owner’s business occupies at least 50% of the square footage of the building.
What is the difference between “affordable” and “market-rate” apartment complexes?
An affordable property has lower rents than a market-rate property and targets low-income tenants through government voucher, subsidy, or community programs. Market-rate property rents are determined by what the tenants in the area are willing to pay to live in that particular quality of property.
What is the difference between single-family real estate (SFR) and multifamily real estate (MFR)?
Any residential dwelling that has 4 or fewer units is considered single-family. Any residential dwelling that has 5 or more units is considered multifamily.
How do I calculate my property’s cash flow / NOI?
There are many ways to calculate a property cash flow, depending on what you are using the numbers for. If you are not calculating for your tax returns, the easiest way is to add up all property revenue (gross income) and subtract all property expenses, excluding depreciation, amortization, or financing expenses.
What is the difference between a refinance and a cash-out refinance?
In a refinance, the loan balance is replaced with another loan in the same amount, whereas in a cash-out refinance there is additional money above the loan balance that is taken out and added to the new loan amount in a cash-out refinance.
How do I know if a property is a good real estate investment?
There are many factors that go into deciding if a property is the right fit for you. Although working with a real estate professional (that doesn’t make a commission of the sale of the property) is the best idea, here are some things to consider:
- Capitalization rate
- General market conditions
- length of tenant lease(s)
- Type of property
- Where the economy is in the real estate cycle
- Interest rates
- Investment strategy/hold period
- Available financing
- Required down payment
Should I use a real estate agent or broker for purchasing, selling, or leasing my property?
If you are an experienced real estate investor, having an agent may not be necessary, but is still advisable under many circumstances, especially if you have other work to focus on as the process (setting up showings, negotiating, etc.) can be quite time-consuming. Consider how much your time is worth and how much experience you have, then go from there.
What is a “1031 exchange”?
A 1031 exchange (also called a like-kind exchange) is a tax-deferment vehicle that investors use in order to limit or avoid capital gains taxes on the sale of real estate, when the proceeds are invested in another property within a given time frame.
What type of property should I purchase?
Although working with a real estate professional is the best idea, some thing to consider are:
- Capitalization rates
- General market conditions
- Market rents
- Market saturation
- Experience with the asset type
- Whether property managers are required
What types of questions should I ask a Seller before purchasing a piece of commercial real estate?
Although this depends on the property type and location, some good questions I recommend buyers always ask (aside from requesting all financials) are the following:
- Is there or has there ever been any environmental contamination on the property/Is there an old Phase I environmental report for you to review?
- Have any of the tenants given notice of their intention to renew/vacate? Is it in writing?
- Are there any current or threatened liens on the property?
- Is there any deferred maintenance or structural problems with the property?
- Have any of the tenants been late with the rent in the last 12 months?
How many different types of commercial loans are there?
There are many types of commercial loans available depending on property type, borrower experience, loan amount, and property location. Some of the main loan types include: SBA, USDA, FHA, Conduit, Fannie Mae, Freddie Mac, Conventional, Insurance, Hedge Fund, Construction, Bridge, Hard-Money, and Mezzanine loans.
Is there somewhere I can get multiple loan quotes and options in one place?
Yes, there are some online lenders or brokers that specialize in various products, but you must be very careful in selecting who you work with to make sure they are reputable and knowledgeable. The one we recommend to all of our clients is Commercial Loan Direct
What type of commercial mortgage should I put on my property?
The type of loan that should go on a specific property is determined by carefully weighing your overall investment strategy, any desired loan characteristics or features, any other properties in your portfolio, credit availability for future needs, as well as any pertinent tax considerations. We highly recommend working with an experienced loan professional in order to get the best product for your property.
How do I check current commercial mortgage rates?
Although rates change on a regular basis (usually daily or by the moment), it is extremely difficult to find consistently up-to-date rates online. The site we like to use the most is Commercial Loan Direct
since it gives on rates various products on different terms and is updated fairly regularly.
What type of information do I need to submit to a lender for a quote?
The information required for a quote depends on the property and product type, but a good rule of thumb is that you should be prepared to submit:
- A personal financial statement (including a schedule of real estate owned)
- A current rent roll with rent, move-in dates, lease expiration, options, escalations, and square footage (or occupancy/ADR if hospitality)
- Internal/external photos of the property
- 1-3 years of property operating statements that identify any one-time or non-recurring expenses and
- 3 years personal and company tax returns (for any loans that will require personal guarantees).
What is the difference between a term sheet or LOI and a commitment letter?
A LOI (Letter of Interest) or a term sheet from a lender is a preliminary indication of interest that they are willing to lend on a commercial property and at what terms, so long as a specific set of conditions are met. A commitment letter comes after those conditions are met and the loan has been fully approved by the lender’s loan committee, with the lender ready to close on the loan. However, some lenders do not issue commitment letters, but go directly from a LOI or term sheet to a closing once the due diligence has been completed.
Do I need financing approval before I make an offer on a property?
No. In fact, most lenders won’t actually underwrite or quote a property until the purchaser already has the property under contract.
What is a CMBS / Conduit Loan?
A CMBS (Commercial Mortgage Backed Securities) Loan
is a non-recourse loan provided by a financial institution that then securitizes the loans by pooling them together and offering bonds that are backed by the underlying real estate as collateral.
What is a Fannie Mae (FNMA) Loan?
A Fannie Mae loan
is a competitive multifamily loan product offered for experienced multifamily investors with properties in major markets.
What is a Freddie Mac (FHLMC) Loan?
Similar to Fannie Mae, Freddie Mac is another competitive multifamily loan product offered to experienced multifamily investors with properties in major markets. The major difference is the available structures for its small balance loan program.
What is an Insurance Loan?
This is a mortgage product offered by life insurance companies for the financing of larger properties. Being the most conservative and competitive of all the products, insurance lenders prefer newer, high-quality properties at low leverage in major markets. They also usually prefer very experienced investors.
What is a HUD / FHA Loan?
An FHA loan is a non-recourse loan product that is federally guaranteed by the Department of Housing and Urban Development (HUD). It can be used for multifamily or various medical facilities.
What is a conventional loan?
Most people refer to loans from FDIC-insured institutions (i.e. banks, savings institutions, credit unions) that are held in their portfolios as conventional loans.
What is a hard-money loan?
This is a asset-backed loan product offered by private investment institutions for the financing of properties that are not “bankable” due to credit issues, asset issues, or other reasons. Because of the extremely high interest rates (usually 12%+), we usually don’t recommend them to inexperienced investors or those that may not be able to refinance out of them within a specific time frame because the loan will not become “bankable” within that time frame.
What is a SBA loan?
A SBA (Small Business Administration) loan is a product offered by select lenders that is backed by the US government. In the context of real estate, it is specifically for owner-user properties and can be a good fit for smaller businesses that are buying a building, expanding a business, or constructing a building that need higher LTV’s.
What is a mezzanine loan?
A mezzanine loan (also known as “mezz debt”) is a hybrid security of debt and equity that is put onto a property in a second-lien position (usually behind a bank or other “senior secured” lender) when the borrower cannot get a LTV that is high enough to appropriately finance a commercial real estate property. It can be used for both acquisitions and refinances.
How do I know if I need a bridge loan or a construction loan for my property?
Bridge loans are typically used for either properties with occupancy problems that do not need substantial rehabilitation or properties with little to no occupancy issues that need light to medium rehabilitation. Construction loans are typically necessary for properties that are vacant and need rehabilitation or unstabilized and need moderate to substantial rehabilitation.
How do I know if my property is in an area that is eligible for a USDA loan?
The easiest way to determine if your property is located in a USDA-eligible area is to search the address at the USDA website
Can I get a commercial mortgage if I’ve had a personal or business bankruptcy, foreclosure, or short-sale?
Having past credit issues isn’t necessarily an immediate non-starter in some circumstances, however there are other circumstances that make financing with reputable lenders extremely difficult if not impossible. Having any of these credit issues in the last 24 months makes it nearly impossible to pass credit underwriting standards. However, under some of the limited circumstances, those who have had a bankruptcy, foreclosure, or short-sale may still be able to qualify for commercial financing. In order to qualify for conventional or insurance financing, these credit issues usually must have happened at least 7 years ago. For other products such as CMBS or hedge fund products, usually they must have happened at least 2 years ago for a business bankruptcy and at least 3 years ago for nearly everything else. However, every lender has their own internal credit guidelines and ways to mitigate potential credit issues for clients with a good story or a strong background. There really are no “hard and fast” rules for all lenders, so it’s best to disclose these issues up front and contact the lenders directly to ask their policy on such credit issues.
What is the minimum credit score to qualify for a commercial mortgage?
Although all lenders have their own internal scales for weighing various credit factors, most lenders prefer a FICO score of at least 680, and will rarely consider anything under 650 unless it is a hard-money lender.
What type of net worth and liquidity do I need to qualify for a commercial mortgage?
For most loan products, the general rule is to have a net worth equal to or greater than the loan amount you are requesting and a post closing liquidity (i.e. after any required down payment) of 10% of the loan amount you are requesting. However, every lender is different and their requirements may be more or less.
What is a personal guarantee? Do all mortgages have them?
A personal guarantee is an agreement that an individual signs that personally guarantees the repayment of the loan in the event that the property (or business) is unable to pay. Typically this means that all the individual’s assets are fair game in the event the person is held responsible for the repayment.
What is a prepayment penalty? Are there different types?
A prepayment penalty is a fee that must be paid in order to pay off a loan sooner than the maturity date. Most commercial loans have prepayment penalties for at least part of the loan term. There are many types of prepayment penalties including declining, yield maintenance, defeasance, and breakfunding, among others.
What is title insurance and do I need it?
Title insurance is a product that insures good/clean title to the property and if there ever is another claim to the title of the property that was unknown but comes to light later, you are insured against any potential losses and the insurer pays to fight your claim to the property.
What is an environmental site assessment (i.e. Phase I or Phase II environmental) and should I get one done?
This is a report prepared by an environmental engineering company that discloses any existing or potential environmental contamination on a piece of real estate. If you are purchasing a property that has ever had or is near any property that has ever had a use that could produce contamination (i.e. auto repair, gas station, smelting company, etc.), it is highly advisable to have one done. At a minimum, you should have a search done on and around the property. Most lenders require them.
If I’m refinancing my property, can I use third-party reports that I previously paid for?
If you are refinancing with a non-conventional lender, sometimes you may update third party reports that were performed for other lenders within a reasonable time frame. If you are refinancing with FDIC-insured lenders, some third party reports may be used, but a new appraisal must be ordered due to federal regulations.