Buying commercial real estate can be a significant undertaking. Real estate can be quite expensive, and you will most likely need to apply for a loan to be able to cover the cost of the property. What catches out a lot of people is the application process. Applying for a commercial real estate loan is a little different than applying for a private loan for a home or even a buy-to-let property.
Most banks will offer commercial real estate loans, and there are a number of private lenders that will do so too. The first thing you need to consider is the amount of money you want to borrow. For small amounts, look to your current bank or a suitable private lender. For large investments, you will need a bigger bank to stump up the funds.
What Lenders Look For
When a lender assesses your application for a loan, they will want to know that you have a sound business plan and that you understand the type of property that you are buying. If it is a commercial entity – such as a limited company – that is taking out the loan, they will look at the credit history of the company. If you are taking the loan out yourself (which is a massive risk, and something that you should not do without seeking expert financial advice), then your credit rating will be looked at – however, your credit score is only a tiny, tiny part of what they will base their assessment on. Unless you are an undischarged bankrupt (and therefore not allowed to borrow large sums of money) your credit score is not going to be ‘the one thing’ that will get the property loan application turned down.
More likely, they will be concerned about things like the business plan, insurance, and your experience with operating the property. If you are buying a large block of flats to let out, do you have tenants? If you are buying land to turn into a car park, have you ever managed such a project before? If you are buying a hotel, what state is it in, and what is your plan to bring in guests?
They will want to see a cash flow forecast, a business plan, and your credentials, and they will sanity check those. Buying property to run a five star hotel in a deprived area does not make sense. Building a car park next to an existing, struggling one would not be sound either. You need to be able to show that you have thought all this through.
Your personal net worth, and your overall credit score, will help you to net a smaller property deal – if your score is below 660 you might struggle to get credit with a smaller lender. If you have foreclosures or bankruptcies within the last few years, you should wait a while to apply. For bigger deals, it is best to seek advice before putting in an application, because there are many other factors that you should consider.