If you’re considering the purchase of a commercial property, a commercial loan is likely in your future — as most investors require some type of funding to complete the transaction. But how much can you afford? What is the right commercial property loan amount to ensure that the property can support the debt?
Let’s look at some of the considerations you should make in order to determine just how much you can afford when financing your commercial property.
1. The property appraisal
Lenders will typically require a property appraisal before they make an approval decision regarding a commercial loan.
The purpose of an appraisal is to establish the market value of a commercial property. The collection of information gathered about the property helps create a baseline metric for lenders seeking to make an approval decision on a borrower’s funding request.
Generally, a lender will not provide more funding than the appraised amount. In fact, lenders have various different requirements for the LTV or loan-to-value ratio. That is the percentage of the value they will loan on the property — the difference is your down payment.
Want to learn more about property valuation methods in the commercial real estate industry? Read our helpful guide here.
2. Your personal and business credit history
It’s not uncommon for lenders to look at the financial history of both you and your business when determining the terms of your loan. The interest rate and length of the loan are important factors in determining how much you can afford to pay over the term of the loan, so be sure to consider how your credit history will factor into the equation.
Is your credit score preventing you from working with certain types of lenders? There are steps you can take to improve your score over time. See our 5 crucial tips for improving your credit score right here.
3. The Net Operating Income
The Net Operating Income (NOI) of your business is simply the annual income of the property after deducting all the expenses incurred from operating the business. NOI is positive when operating income exceeds expenses. For the purposes of getting a commercial loan, this can be based on historical financial data and/or projected estimates for future years.
4. Other important financials
In addition to your NOI, you should consider other important financial data of the property to determine what you can afford. This includes potential rental income, vacancy losses, and any other income that may come from the property — such as vending, parking, laundry, etc.
Finding Commercial Real Estate Funding
Securing the right commercial real estate funding is an important step in your investment journey. Our loan professionals at Commercial Direct (a Division of Silver Hill Funding, LLC) would be happy to help you navigate these waters to find the right program that works for your specific needs. Connect with us today to learn more!
Zack North is the Director of Marketing for Commercial Direct. As a regular contributor to a number of top industry publications, Zack enjoys writing about topics that help investors and business owners approach commercial mortgage financing with confidence.