Commercial real estate is property used exclusively for business. It will generate income for the buyer. Purchasing this type of property is very different from residential properties. It is typically more expensive and involves more risk.

If you are considering investing in commercial real estate, some initial actions to take include:

• Crunch the numbers – Compile your financials and determine what your revenue stream will be. Make sure you can meet the repayment terms. Be realistic about the income the property will generate.
• Develop a team – Meet with professionals experienced in commercial properties to help guide you. They might include an attorney, accountant, realtor, lender, and insurance agent.
• Determine a loan amount – Once you have an in-depth understanding of your finances and the approximate value of properties you are considering, come up with a loan amount you are comfortable repaying.

If you are ready to move forward, here are some expectations from lenders when it comes to financing commercial properties.

Solid Credit History

As with many applications relating to finances, a lender will review your credit history to determine eligibility for a loan. Loans for commercial properties may have stricter standards for credit since there is a higher risk involved. You will need to provide any supporting financial documents with the loan application.

Down Payment

Some residential loan programs will finance up to 100% of the property purchase. That is not the case with commercial real estate. At a minimum, you will need to have a down payment of 20% of the purchase price. Depending on the level of risk, the down payment may even be closer to 40% of the purchase price.

Appraisal

Lenders require an appraisal so that they know the accurate value of a property. Appraisals will show comparables of what similar properties recently sold for in the area. The value can also depend on the size and location and how accessible it is to future tenants.

Servicing the Debt

A lender will calculate a debt service coverage ratio. The formula for that is the amount of income the property has the potential to generate minus the monthly repayment amount. Typically, that ratio should be between 1.1 and 1.4.

Investing in a commercial property can be a smart strategy. It is essential to do the research upfront and know how much you are willing to borrow. It will make your initial meeting with a lender smoother and expedite the process.