Commercial and Investment Real Estate Lending

Purchase money loans are the bread and butter of the lending industry along with Refi loans. Purchases are usually cleaner and easier finance assuming the seller has trailing 12 months of P&L statements and rent statements.

A Refi loan can be a simple rate and term refinance or it can be a cash-out refinance. If it is a cash-out refi then the max LTV is typically reduced by 5% from a purchase or rate and term refi. Fairly straightforward loan as long as we have the trailing 12 months P&L statements and rent roll.

Bridge loans are typically also know as hard money loans. Rates will be the highest of all the loans and typically run 1-2 years plus extensions, for a fee. These are used when you need speed or the cash flow is well below market and a DSCR loan won’t work.

Loans guaranteed by government agencies are typically the lowest rate in the industry at any given time and market conditions. Depending on the agency, the minimum threshold is $3MM – $7MM for the standard agency loans. But so many loans exist in the $1MM – $5MM range that the Small Balance Loan programs were established. These loans have a slightly premium rate to the standard agency loans.

Agency debt is loans guaranteed by the GSEs (Government Sponsored Entities) like Fannie Mae, Freddie Mac, HUD/FHA, etc. These are full doc loans but are generally non-recourse and have standard qualification processes that take longer than the typical loan. Allow 90 days or more with the calendar heavily driven by the speed of your responses to their documentation request. If it is a construction loan, it could take 15-18 months.

DSCR loans are Debt Service Coverage Rate loans and are primarily driven by the quality and cash flow of a property rather than on the strength of the borrower. The DSCR ratio is the property NOI divided by the cost of the loan, or debt service. For 1-4 unit properties the NOI is simply the PITI (Principal, Interest, Taxes, Insurance) and HOA payments or could be 70% of the Short Term Rental (STR) income. The ratios will vary from 1.0 to 1.35+ depending on the lender. Private lenders will go as low as 1.0, agency debt around 1.18, while banks are 1.2-1.25 and for the best rates you can see DSCR in the 1.35 – 1.5 range.

An ARM is an adjustable rate mortgage with the term typically being a fixed rate interest period, though not always. The loan will be described as having a certain margin, or spread, over an index rate, and have a specific time period before the rate starts adjusting. The terms, margins and indices vary between lenders. Typically the index will be something like the Wall Street Journal Prime Index, SOFR, 10 year treasury rate, or others. Depending on the index, they can adjust quickly or slowly to market changes so make sure you understand the impact of the index chosen and your investing strategy.

Everyone should be familiar with this type of loan since it is one of the most common terms for consumer loans when we buy our homes. The interest rate is fixed for 30 years and payments are fully amortized so the last payment in the final year pays of all the principal and interest owed on the property and the property becomes free and clear, ready to be used as collateral for additional projects. Some 30 year loans have a 5 year IO (Interest Only) component which makes it easier for you to qualify for the loan. It also makes it easier to cashflow. After the 5 years it converts to a fully amortized loan over 25 years. Your payments will take a jump up so most people will refinance at the end of the IO period.

2nd Trust Deeds are a form of hard money and are among the highest rates on the market at any given time. However, if you have a low interest rate 1st TD, the blended rate with a 2nd TD may be less than a complete refinance with a new loan. Lenders will look at the ratio between the 1st and 2nd and typically don’t like to have a small 2nd behind a large 1st because if they have to foreclose, it could cost the lender a lot of money to cure the default and they end up throwing a lot more good money to protect their 2nd and they portfolio returns will suffer. Keep in mind that these are riskier loans and will have higher rates and points than other loans. Some 2nd TD lenders will look at the risk and if it is too high, will decline to make the loan. However, if you are willing to put your personal residence on the line as additional collateral, they are more likely to stand side-by-side with you to make the loan.

These loans are more rare than most. Lenders prefer to have one loan for one property. If they make a blanket loan they like to see the property types to be similar and tightly connected in a geographic location. Generally they will not cross state lines since lending laws vary from state to state and it is too complex to have a “one size fits all” loan program for multiple states

Fix and Flip loans are pretty common to offer a variety of terms from 70% to 100% LTV (30% – 0% down) but they typically always offer 100% of rehab so if there is a default, the lender already has completion funds set aside. The leverage and rate vary based on experience in the past three years and your FICO score. The third component of these loans is the draw program. Typically you will need a draw inspection and submit for the draw against the construction/rehab budget including lien releases from the contractors on the project. Some lenders are notorious for being slow and difficult, taking 2-3 weeks by the time the contractor gets paid. By this time the GC has moved his crews to another project that is paying more promptly and it is difficult to get them back on the project. It is generally a good Idea to have 1-2 draw worth of cash on hand so you can ensure your project schedule does not suffer with workers being pulled on and off a project. One of my best lenders offers a 100/100/100 program where they defer the loan payments and you are only out of pocket for insurance and maybe taxes. You will have to provide the deposit for the property to open escrow, but that will be refunded to you at the close of escrow. This amazing program also accepts borrowers with no experience and poor FICO scores. This loan caps at $1MM total for purchase and rehab which can be no more than 70% ARV (After Repair Value).

Ground up construction loans are typically starting with a land component. They always want to be in 1st position and will pay off any existing loans on the property. Since equity is required anywhere from 15% to 35% of the total project cost, be prepared to have this equity on hand. Frequently in high land value states like California, the land value is close to the equity required so buying land all cash typically allows you to not put up more cash with the construction loan. Your experience and financial strength will drive the leverage and terms on these loans. It is most helpful if you have a detailed construction bid from an experienced contractor as this will help you qualify for a loan. If you plan to self-perform the work, you will probably need a 3rd party GC to bid on the entire contract as the lender will want to set aside enough funds in construction for them to complete the project if they have to take the property back. If they rely solely on your self-performing bid, they will fall short on the construction budget if they have to take over. Your experience in the past 3 years with the identical property type is the most critical piece of qualifying for these loans. If you are new or have limited or no new experience, you may want to pay someone to be part of the executive team to handle the project for you – this helps qualify for the loan.

Land loans are the lowest leverage loans and typically higher cost as well, since they are the riskiest. In bad markets the max leverage will be around 30% LTV. In good markets you can generally find 50% LTV. Higher than this there have to be mitigating factors showing the financial strength, experience or highly desirable location of the land with a large pool of potential buyers. This loan is typically taken out by the construction loan.

Horizontal work loans are for the infrastructure on raw land to put in utilities and roads. Sometimes construction lenders only want to go vertical and wont’ fund horizontal work. This is mainly required for larger developments and needs to be discussed early on as part of the development financing process to see what is required.

This is your typical construction loan. In larger developments there are more lenders who will only come in once utilities and pads are in place than those who will finance the horizontal work.

On larger projects, your construction loan may mature before you are stabilized and ready for a permanent or DCSR type of loan. In those cases, you may need a hard money loan to bridge the project from construction completion through lease-up and the permanent loan to replace this loan. This is more complex and requires more planning in advance.

When you have a project that stalls and needs to be refinanced, this is a high risk loan and more challenging. There are fewer lenders for this type of loan than other loans. If it is your project that stalls, you need an excellent story on why you need to refinance mid-construction so that the lender doesn’t think it is a high risk loan. If you are buying a broken project, the leverage is typically lower than other loans due to unknown and undisclosed risks.

Usually competitive for the best rates and credit unions are the best, when they lend on your product type. However, they all require a full financial proctology exam and are full doc loans. They can take 45-90 days.

These are anywhere from mid to high rates in the market, depending on the fund’s niche and lending standards.

Institutions and hedge funds can be the lowest rates in the industry along with Agency debt, but, like banks, will require a lot of detailed information to qualify for a loan.

Family offices are basically the same as institutions and hedge funds, but can be lower doc if the principals understand your project type and geographic location.

The fastest loan we ever made was 18 hours and the client stiffed us on the loan fees. Hard money closing in 1-2 weeks or possibly days is possible if you are on top of all your documents. We can coach you on this in advance so you are ready should you ever think you need to move quickly. This money typically comes from high net worth individuals who have defined the loans they like to make and if you fit their box, you can get a loan.

This is a varied group people and can look like any of the lenders except banks and agencies. We have fully proven lawyer documents that we can make loans compliant in any of the 50 states for high net worth individuals wanting to allocated resources for a specific loan type. These are usually the source of funds for many direct private lending companies.