Financing an investment property can be very straightforward or end up being very tricky. The main focus of lenders in such situations is the strength of the underlying cash flow, i.e., the lease(s). This strength is assessed based on multiple parameters:
Who is the tenant
How long is the lease for + How long has the tenant been in this location
What additional property costs are covered off in the lease, e.g., utilities, property taxes, maintenance, management, capital projects, etc. More costs covered by the tenant implies less variability on the landlord’s cash flow
How reasonable is the lease rate for that property/area/market. This is often validated by the appraiser and the larger banks have their own in-house experts doing a sanity-check as well
Besides the lease(s), the lenders give a lot of importance to the property itself – their main security. What lenders are trying to assess is how “marketable” the property is, either to potential new tenants or for sale. Factors to consider here are:
Location – big cities are favored over small towns; busy parts of the city are favored over less traffic-density areas; connectivity (highways/public transit) is better than not
Age – newer properties are favored over older ones
Upkeep – recently renovated properties are considered more desirable than run-down ones
Parking – it is important to have ample parking as it will attract better quality tenants
Services, like electricity, water, sewage – it is better to have municipal connections than relying on own generators, wells and septic tanks
Experienced management is always an important factor for lenders but in the case of high-quality commercial investment properties, it can sometimes take a back-seat to the other factors listed above.
Another consideration is size: because of the way departments at most larger banks are structured, there may be limited appetite for smaller commercial mortgage deals.
As in all things business, knowing the right people is just as important as having the right product knowledge. At Platinum Consulting, we have both.