There are a number of steps involved in carrying out a commercial real estate transaction successfully. Probably the first step should be to check your credit score since a poor credit score has the potential to kill the transaction before it ever gets going. Assuming that’s not a problem, there are some other follow-up steps you’ll need to take before you can successfully conclude your commercial real estate transaction.
Do a Property Appraisal
It’s essential that you have a fair market value estimate of the commercial building and surrounding property. For this, you’ll have to hire a real estate appraiser, so that you don’t end up borrowing more money than the entire property is worth.
Have a Good Credit Record
It’s probably even more important to have a good credit record when purchasing commercial real estate than it would be for a residential purchase. This is due to the fact that commercial properties cost more than residential ones, so there’s even more money involved. Any lender will want to know that you have the ability to repay a mortgage you take out with them, so it’s essential that you demonstrate a good credit record.
Understand the Total Cost
When you are about to make a purchase of commercial real estate property, be sure you understand all the related costs. Apart from the property cost, you may also incur expenses for repairs, financing costs, a down payment, advisor fees, and taxes on the property.
Be prepared to pay at least 20% of the total cost of the property as a down payment. Even this is a very conservative figure, however, and you are much more likely to have to pay between 30% and 45% as a down payment because the cost of commercial real estate is generally very high. If you can’t manage this kind of down payment, you might want to reconsider the transaction.
Debt Service Coverage Ratio
This calculation is determined by comparing the net cash flow of the property to the amount of the monthly mortgage payment. This will allow the lender to know whether or not you can afford to meet monthly payments, and whether or not you are a good risk for making the loan in the first place. An acceptable debt service coverage ratio might be in the area of 1.3 or 1.4, which means that for every dollar you pay toward the mortgage, your property is earning $1.30 or $1.40 in incoming revenues.
Need funding for your next commercial real estate transaction?
Commercial real estate opportunities pop up suddenly, and if you can’t react quickly, you’ll probably lose out on a golden opportunity. If you’d like to avoid that kind of scenario, contact us at Affinity Capital Funding to discuss some options for funding that next important commercial real estate transaction.