Factors lenders use to evaluate commercial properties. For help in obtaining a commercial mortgage call at 516-590-9803 or visit the website www.businesslendinginfocenter.com
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Hello, this is Paul Warkow from Business Lending Info Center. This is the place to be if you are looking for a commercial mortgage, whether it be purchasing a new property or refinancing your current property. Call me, e-mail me or click on the button at the bottom of this video to go over situation and figure out what is right for you.
Although there are similarities, commercial mortgage lenders evaluate the application differently than a residential mortgage. Here are some of the items that commercial lenders look at in the application process.
Unlike the residential mortgage, which evaluate the borrower first, commercial mortgage lender looks at the property first. Factors such as the ability of the property to generate income that will support all the expenses and the mortgage payment go into the evaluation of the property. Other factors such as the property’s financial history, is it properly maintained and the area where it is located is also important.
There are several measurements the lender will use in evaluating the property. One is Net Operating Income. Net operating income means the income the property produces minus the expenses. Keep in mind income does not mean rent only. Income can come from other sources such as vending machines or advertising placed on the outside of the building. If the borrower is occupying part or all of the building to operate its own business, the business income will also be included. Expenses will included everything associated with running the building except the mortgage payment.
A second factor is cash flow. Simply put cash flow is net operating income minus the mortgage payment. Obviously, the property should have a positive cash flow.
Another important factor is cash on cash return. This is the annual cash flow divided by the down payment. For example, if the property has a cash flow of $20,000 a year and the down payment to purchase the property is $20,000, then it takes one year to recapture the down payment and the cash on cash return is 100%. If the cash flow is $10,000, it will take two years and the cash on cash return is 50%. If it takes 4 years, it will be 25% and so on.
Finally, another big factor is the capitalization rate. The capitalization rate is the net operating income divided by the sales price. So if the net operating income of the property is $50,000 and the property was purchased for $500,000, the capitalization rate would be 10%. Capitalization rates are very important because when lenders compare properties in the same
neighborhood for purposes appraising the property, they will compare capitalization rates. Although capitalization rates are not the only factor in a commercial property appraisal, it is an important one. When a purchaser is making the decision to buy a commercial property, all these factors should be known. A good commercial mortgage broker will know the numbers mean and be able to help the client.
If you need a commercial mortgage for an investment property or the place to operate your business, we will help you every step of the way. Call me, e-mail or click on the button so we can discuss your situation. The availability of commercial loans has never been better, let’s get started.
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