A CRE loan can be a tremendous way to increase cash flow by purchasing an income-producing property, and it is used solely for business purposes. In order to be approved for a commercial real estate loan, there are a few key concepts and terms to grasp including cash flow, debt-service coverage ratio, the crucial process of drafting a business plan as well as researching the surrounding area.

Cash Flow and Debt-Service Coverage Ratio

Cash flow is directly related to the debt-service coverage ratio and could make the difference between getting approved or denied for a loan. A DSCR compares a property’s annual net operating income with its annual mortgaged debt. It is found by dividing NOI, annual net operating income, by the total annual debt payments. Always aim for a DSCR above one because anything less signifies a negative cash flow which lenders do not like to see. The lower the ratio, the better. Lenders typically seek out a DSCR of 1.25 or higher.

Importance of a Business Plan

Developing a clear and transparent business plan is one of the most important things to do prior to approaching a lender for a CRE Loan. The plan should include information on the property itself, the surrounding area, current economic climate, how you plan to use the loan, and other financial information. Having all your financials and goals in one place will help you not only appear trustworthy to the lender, but help you in the future as well. Being new to property investments, developing the business plan will be a critical step. Once you gain more experience with commercial real estate, you can begin to highlight that experience in your resume which will benefit you in the future.

Research Surroundings

It may be beneficial to find a non-bank lender or private commercial real estate lender in your local area which can be found online. Researching the area in which you are hoping to buy as well as the process of properties that have sold will help you gain a better understanding about the property you are hoping to purchase and whether you have the power to negotiate. Additionally, it will help the investor to see that you have the ability to make a smart investment.

Obtaining a CRE loan is not as difficult as it seems and can be the perfect way to purchase properties that used to increase your cash flow. Becoming knowledgeable of key terms as well as the surrounding area of where you wish to buy and creating an organized business plan, will be helpful when it comes time to get approved for a loan.