Jan 3, 2022
If you're new to real estate investing – or even if you're experienced in residential but new to commercial– the term "small balance business loan" may be perplexing. You may learn everything there is to know about these loans, as well as the optimal times to consider them to help you boost your investments and profits.
To explain it as plainly as possible, a small balance business loan is a type of financing that some lenders provide for almost any type of commercial property. It differs from regular commercial loans, which are commonly referred to as "large balance loans," in that it is significantly easier to close due to its lenient underwriting standards. Whether you've had credit issues in the past and are having trouble getting traditional loans approved, or you simply need cash now, a small balance loan could be the answer.
A modest balance loan looks at the property itself rather than your personal or corporate credit history. Lenders typically examine three variables when evaluating a loan application:
· The property's nature and condition. The lender will want to see the type of property you intend to buy and its current condition. It could be a well-maintained apartment building or a multi-company office building that needs renovation.
· The cash flow of the property. If the property already has tenants or has previously had tenants, the lender will want to look at the rent records to see how much money the property can bring in.
· The loan's ability to be repaid. Finally, the lender will want to know that you can repay the loan, so you'll probably have to give proof of your earnings, bank statements, and other documents. The property's cash flow can also be factored into your ability to repay if it's good.
You will need to present some documentation before being authorized for a small balance business loan. This might contain "rent rolls," which simply list each tenant's monthly rent for each property. It's useful for figuring out how much money the property brings in each year. You'll also have to supply a list of your expenses, which should include everything from upkeep and landscaping to taxes and insurance. You will, of course, be required to present identification and verification documents.
Take the time to study LTC and LTV percentages to grasp the loan size options better. Small balance commercial lenders are likely to provide you with a loan for 70 percent to 80 percent of the property's cost and/or value, which is common. You should also think about the interest rate you're being offered and keep in mind that interest rates on these types of loans are often higher than standard mortgages because the underwriting procedure is less stringent.
· Opportunity. Are you ready when it comes knocking?
If you're a mortgage broker looking for work, here's a knock worth hearing: Commercial real estate loans with a low loan-to-value ratio. Why? For several reasons, today's market conditions are favorable for you to investigate the small-balance commercial real estate space: growing investor appetite for small-cap commercial real estate; increased compilation and regulation for banks; increasing residential mortgage interest rates on the horizon; and plentiful small-commercial loan refinance opportunities with terms or payoffs coming due to name a few. If you're a residential mortgage broker who hasn't considered diversifying your business by offering small-business loans, here are the top reasons why you should.
· Because you can
You're almost there if you've already originated a loan for a multifamily property with two, three, or four units. Did you know that commercial real estate includes five or more units of multifamily properties? While there are some differences between residential and commercial mortgages, multifamily loans follow a similar process and approach. It's possible you don't realize how close you are to getting a commercial loan.
· Diversification is a wise decision
It's an innovative business to add a new revenue stream. Wouldn't it be great to have another plan in place to bring in new or incremental business when interest rates increase and residential mortgage refis decline? The small commercial is a natural extension of your product line, allowing you to serve more customers. You can also add value to referral partners who might not have a resource for their clients' commercial real estate financing needs. Inform them that your service shave been expanded. You can also reach out to new referral sources such as attorneys, commercial Realtors, and insurance agents for potential small-commercial businesses.
· You have contacts
Aside from the additional revenue, one of the best aspects of getting into a small-balance commercial is that many of the borrowers who need financing are clients or contacts you already know. Small-commercial borrowers are frequently the same clients you've worked with on the residential side for years – small business owners, entrepreneurs, professionals with their practice, first-time and even seasoned investors. If you don't know who they are, chances are someone in your referral network, or sphere of influence does. It's not difficult to locate potential loan opportunities. A lot of them can be found in your business book.The REO (real estate owned) section of closed loan files is a quick and easy way to find clients who own commercial real estate.
· It is not a difficult transition
Begin by completing transactions that are a natural extension of your existing residential business. Because the real estate is most similar to residential, it's a common investment, and properties can be found just about anywhere; multifamily is typically the best transition into small-commercial lending. Another good option is mixed-use commercial real estate. Beginning with these more"basic" property types will give you the confidence to move on to more complex deals and a more comprehensive range of lending programs. Many brokers we've worked with have told us that small commercial transactions are more straightforward than they expected. Frequently, the only regret is that they did not begin sooner. Another phrase about chance is "success":"Success is what happens when preparation meets opportunity." You've put in the work, and now it's time to seize the opportunity. Could today mark the start of a new chapter in your professional life?