5 Tips When Choosing Your Commercial Bank
Relatively new commercial real estate investors can benefit from seasoned borrowing advice. Most individuals complete 4-5 real estate transactions in a lifetime and those typically comprise of home purchases, commercial transactions are even more rare. It’s difficult to get commercial borrowing experience. Below are my top 5 tips for new commercial real estate investors for finding a bank.
1. Big Banks vs. Local Banks.
For you, the consumer of financial services, big banks, such as Bank of America or Wells Fargo, provide great products from checking accounts to debit cards and it’s likely you already bank there for good reason. Their fees are low, their on-line banking is amazing and they have ATM’s everywhere. These services, however, don’t necessarily translate into being a good commercial real estate lender for the new commercial real estate investor. My experience is the loan agent you’ll most likely talk to has no control over your loan approval or the time in which it will get approved. I’ve had big bank loan approvals come in 60 days (or more) after the closing date. Most sellers won’t wait around this long and you’ve lost your investment opportunity. The loan agents usually have some answer like “I don’t know what’s going on, it’s stuck in the Dallas office in underwriting.”
Local Banks can be a much different experience. Often the owners are local as is their board of directors and these are the people who set the direction and tempo of the bank. They typically have an excellent feel for the local market and already have knowledge of the commercial property you’re trying to purchase. Despite what your contact at the big bank says, at the very least you need to give a local bank an opportunity.
Insider Tip: The promise of lower interest rates or fees are useless if the bank doesn’t perform.
2. Know your Bank’s Business Model
Banks are like any business, they need consumers to make a profit (yes, I completely overcame my desire to make a snappy pun here about banks being in the business of making money). Some banks like deposits and ATM fees, some like car loans, some like commercial real estate loans in the range of $1-$10M, others like commercial real estate in $10M to $100M.
Insider Tip: The big bank loan agent may not be your best source of information. They want to look at everything, even if they’re not in the market for your loan. Ask an experienced deal maker (like a commercial real estate broker).
3. Shark Tank
A bank is sizing you and your investment opportunity up. Commercial loans are regulated differently than residential loans and it’s their decision whether or not to invest in you. Think of it like making a presentation on the television show Shark Tank. You need to have the stats and figures explain why your commercial property is a good investment.
Insider Tip: Enthusiasm with sharp statistics never hurts.
4. What are Banks Looking For – Part 1
Bank will loan 80% of the purchase price, usually requiring you to bring the remaining 20% in cash.
Insider Tip: Banks will at times let you include the property’s equity, which lowers your cash requirement, if you’re making a particularly shrewd buy.
5. What are Banks Looking For – Part 2
A bank will also typically require your Debt Service Coverage Ratio (DSCR) to be 1.25%.That means your Net Operating Income (NOI) needs to be minimum 1.25% of your mortgage amount [$100k of annual NOI and $80k of debt service (the annual principle and interest payments of your loan) results in a DSCR of 1.25%].
Insider Tip: Banks have more flexibility if the commercial property is going to be owner occupied.
The biggest take away is to know that commercial real estate loans are handled differently than residential loans. Take the time to understand your bank and their goals and it will help you achieve yours. A good commercial real estate broker can be a great resource.