Buying A Commercial Property That Doesn't Seems To Cash Flow
In the NY area we use a vacancy rate of 5%. Other parts of the country experience real vacancy factors ranging from 5-15% at any time.
When factoring in management reserves, even a self managed building has a cost associated with management. Sweat equity has to figure into it somewhere.
As for maintenance every building needs some maintenance for waste removal, plumbers, minor repairs, painting, etc. These things do and can costs money.
One thing most commercial property owners and future landlords failed to factor in their equations when calculating expenses truly are the replacement reserves: A brand new roof or boiler may have a 25 year life. But that money had to come from somewhere and it needs to be accounted for. To get that figure you divide the cost into 25 years and budget that amount for replacements.
If you don't factor these items in, don't worry. All commercial bank underwriters will put them into the calculations as debt service deductions. Most commercial mortgage lenders have a DCR requirement of at least 1.10. What that means is that the building needs to bring in 1.10 for ever dollar of debt service.
The example above yields somewhere around $3100 monthly for debt service. At 7% for 30 years , the loan is around $470,000. The sales price is $900,000. Its debt service using a traditional formula won't qualify for the loan the property owner is asking for.
So what do you do! Well their a few smart unconventional lenders who will underwrite this loan with low or no debt service expense ratio.
How is this possible you ask? Well they simply view it as an equity deal and they value the property at the appraised value and not its income producing value. They will usually factor in that rents may not be at market value and use a building projected cashflow in the future.
At the same time to protect their interest they will make the loan with a few stipulations. The loan to value will usually be around 80% for mixed used and multifamily property types, and 75% for all other commercial property types. And the borrower's credit score will have to be at least 650. However most commercial lenders will allow you to do the deal stated and have a seller held second mortgage for a combined loan to value of 90%
Most commercial loans of this nature are usually full re coursed and the underwriters usually factor in the person's financial and personal credit history as evidence that they can manage the project correctly.
To make it short and sweet the types of deals that qualify for this type of loan are because of the equity in the property and not because of its loan to debt service characteristics.
Do you not want to show debt service on your next property acquisition or are trying to refinance a loan where the property doesn't debt service.
To help you in your path look for commercial lenders who based their lending on low to no debt service coverage and that that will make the grade equity wise.
When factoring in management reserves, even a self managed building has a cost associated with management. Sweat equity has to figure into it somewhere.
As for maintenance every building needs some maintenance for waste removal, plumbers, minor repairs, painting, etc. These things do and can costs money.
One thing most commercial property owners and future landlords failed to factor in their equations when calculating expenses truly are the replacement reserves: A brand new roof or boiler may have a 25 year life. But that money had to come from somewhere and it needs to be accounted for. To get that figure you divide the cost into 25 years and budget that amount for replacements.
If you don't factor these items in, don't worry. All commercial bank underwriters will put them into the calculations as debt service deductions. Most commercial mortgage lenders have a DCR requirement of at least 1.10. What that means is that the building needs to bring in 1.10 for ever dollar of debt service.
The example above yields somewhere around $3100 monthly for debt service. At 7% for 30 years , the loan is around $470,000. The sales price is $900,000. Its debt service using a traditional formula won't qualify for the loan the property owner is asking for.
So what do you do! Well their a few smart unconventional lenders who will underwrite this loan with low or no debt service expense ratio.
How is this possible you ask? Well they simply view it as an equity deal and they value the property at the appraised value and not its income producing value. They will usually factor in that rents may not be at market value and use a building projected cashflow in the future.
At the same time to protect their interest they will make the loan with a few stipulations. The loan to value will usually be around 80% for mixed used and multifamily property types, and 75% for all other commercial property types. And the borrower's credit score will have to be at least 650. However most commercial lenders will allow you to do the deal stated and have a seller held second mortgage for a combined loan to value of 90%
Most commercial loans of this nature are usually full re coursed and the underwriters usually factor in the person's financial and personal credit history as evidence that they can manage the project correctly.
To make it short and sweet the types of deals that qualify for this type of loan are because of the equity in the property and not because of its loan to debt service characteristics.
Do you not want to show debt service on your next property acquisition or are trying to refinance a loan where the property doesn't debt service.
To help you in your path look for commercial lenders who based their lending on low to no debt service coverage and that that will make the grade equity wise.
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