Dear Reader,

In today’s article, commercial investor Toby Unwin explains why you shouldn’t be intimidated by the BIG deals…In fact, he’ll show you one of the main reasons he finds it’s actually easier to buy large commercial property than small residential ones!

Why It’s Easier to Finance a $5 Million Shopping Center
Than A $100,000 House
By Toby Unwin

In my last article, I discussed why commercial real estate is not in the same risky “bubble boat” as residential property. Basically, it’s because the value of commercial property is tied to the income it can produce, unlike residential property.

Today, I would like to go a little deeper into another major benefit of investing in commercial real estate investing compared to residential: securing financing is actually far easier.

To illustrate this point, let me tell you about a recent experience of mine. I just brought a shopping center down in Pompano Beach, Florida. To get my down payment I refinanced my home(again). It was an interesting opportunity to see how the residential and commercial loan processes are back to back. It also highlighted what I have always told my investing students – which is that it is actually easier to get financing for good, income producing commercial real estate deals than it is to finance your own home!

It’s a point I think is important, because I think many people allow themselves to be intimidated at the prospect of buying commercial real estate. This is unfortunate in that these are the types of deals that can realistically provide you with enough cash income to comfortably retire in just one deal.

The #1 Difference Between Commercial and Residential Lending

When securing financing for a residential property it’s you – personally – who must qualify. You have to provide tons of paperwork about your job history, credit, bank accounts and more. If your financial records are not “up to par” you simply will not get approved, or perhaps only approved for a small amount that doesn’t cover the price of the property you’re interested in buying.

Commercial lenders, in contrast, don’t qualify you, they qualify the property. Is this a good deal? Is the property in good shape, does it have good tenants, will it produce surplus income to cover unexpected costs? If so, then the loan can be approved – even if it’s a $5 million property and you work at the local car wash part-time. After all, you’re not applying for a job as a property manager – the cost of hiring somebody else to manage it for you is built in to your expenses (just another of the many benefits to owning commercial property!).

So the major difference between financing a commercial property and a residential property is that the lender qualifies you when you buy a house and the deal for commercial investment. Now let’s get back to my story, and note some of the other differences you will experience between the two types of lending.

Finding A Lender

For my home mortgage I went to lendingtree.com. I often go there as I get good quotes. I usually just start there to get a quote and then beat my usual lender down with it. I called him too, unfortunately he didn’t get back to me for a couple of weeks. I needed to get the thing closed in the meantime, so I wound up going with one of their lenders.

On the commercial side I have a spreadsheet of lender contact details that I add to continually. Currently it has about 220 names on it with email addresses. I loaded them into an email program and contacted them all. I soon wished I hadn’t as the phone rang off the hook for the next two weeks. Every time I put it down I had two voicemails waiting. Next time I’m only doing my top 20.

I was firm with these guys – I emailed my standard information pack and told them what the current low offer was to beat. This information pack is not filled with my tax returns and most recent bank statements. No, it includes financial information about the commercial property. Who are the tenants, how long have they been in business and how much do they pay? What are the operating costs for the property and what does that include? All of this information, by the way, is provided by the seller. I do not have to spend my time running around making copies of leases or anything like that. My full course on investing in commercial real estate goes into more detail about what “selling points” I always make sure are included in these packs.

I got about 150 quotes followed up with 70 commitment letters. One guy was near to tears when I told him he hadn’t got the loan.

Back to my home loan. Lots of guys offered me 80% Loan To Value(LTV) loans. I know many lenders will tell you what you want to hear to get the loan, so I’d ask them to fax the pre-approval from the lender over to me. It soon became clear that I wasn’t going to be able to get there on a stated income loan for a house of my size. 70% was the consensus of where it could be done. I called my usual guy, he was on holiday. I had to go with the on-line lender.

A Solid Commitment Vs. “Not Worth the Paper It’s Written On”

I now had a stack of commitment letters for the shopping center loan. It’s just that – a commitment. You accept the letter, pay them a fee (I’d get this back at closing from the seller), and they’re committed to give you the money. If they don’t, you can sue them. I went with a mortgage broker recommended by the seller (a real good guy with a $100M portfolio) and sent off my chek. I was in business.

The residential lender sent me his “commitment” letter. These things are worthless. I put it to one side and called him three times a day for updates. We scheduled an appraisal. I know a good guy for these and that went quickly with a good valuation.

One week later underwriting spat the loan out with a problem. They said they needed two appraisals. My usual residential lender, Ralph, was back from holiday now – “its standard on all jumbo loans to get two appraisals, he should have known that”, Ralph said. Another appraisal was scheduled. I started to worry - I needed the money to do the shopping center deal.

While My Commercial Deal Cruised Along, The Residential Sputtered…

On the shopping center all was quiet. Raul, my real estate broker handled everything; survey, appraisal, environmental report, all the dozens of irrelevant details that need to get done – I didn’t see any of it. I had to make one call to authorize insurance and send one email to confirm a survey order. That was it.

The information pack went back to underwriting for my house with the second survey (commercial only needed one). Silence. “Where’s the pack? Who’s working on it? What’s their number? Can I speak to them?” No good answers to any of these questions. “Are they going to do this deal, or not? If not we need to go with another bank”. Days flew by, they turned into a week.

Commercial deal – no action needed.

“Ralph, I’m not sure these guys can do it, can you start work, please?” I asked my usual residential lender. A few days later I had to put up another deposit on the center. I asked both lenders, “When’s the closing?” Silence. “I can definitely get you 60% LTV” a friend of my wife’s said, “I know the lender personally”. At that time anything looked good. A third broker started work on the loan and a third appraisal was ordered.

Commercial deal – no action needed. “Everything’s going fine” Raul told me. “I have a check list and everything’s getting ticked off. You’ve done everything you need to do here. What’s up, you sound tired?”. I told him my mortgage woes.

Raul recommended a banker he deals with – a fourth residential lender joined the fray. “Good news,” the on-line guy tells me, “you’re approved. You just need to sign this 1065 form to proved you filed taxes and we’re done.” I signed and sent it back. We waited three days for a third party company to check. The company couldn’t find my records and the lender dropped the loan. I screamed at the broker as I had my accountant fax him copies of my past five years tax returns. It was too late, the lender wouldn’t look at it again.

Commercial deal – no problem. Closing scheduled for 2 weeks time, and I’m sweating about where my down payment is going to come from.

I called Ralph every hour. At the end of the fourth day he said it was ready to close – 65% LTV, a far cry from the 80% originally promised by Lending Tree. I signed grudgingly and wired the money off for my commercial closing.

I’d like to tell you the commercial closing went happily ever after, but it wouldn’t be true. We didn’t get the usual smooth closing following a last minute rush. The lender told us they weren’t ready to close and we spent a week arguing with them and their attorney. Then we closed. But I can honestly say that normally my commercial closings are very smooth, and that even with this last minute hassle it was a far more pleasant experience than the residential side.

I now have a shopping center and am flying down to talk to the seller next week about buying a portfolio of properties from him.

Moral of the Story

I share this story with you today so that you can see first hand how un-intimidating a commercial real estate purchase really is. Most people simply don’t realize that it’s not only possible for you to qualify to buy a multi-million dollar commercial property…it may actually be easier than qualifying to buy a $100,000 house. And I guarantee that house will never provide you with the same level of income good commercial property will.

Toby Unwin is an active investor and Author of the Best Selling “One Deal From Retirement” commercial property investment home study course, which outlines how a single deal can provide you with enough cash flow to retire.