Every commercial real estate investor breathes a sigh of relief when they are approved for a loan, and while obtaining financing is the biggest hurdle for many, not every loan is a good one. Many investors make mistakes that place them in a precarious position down the road as they work to achieve their financial goals.
Here are the top 10 commercial real estate loan mistakes you should try hard to avoid:
1. Not Researching Sufficiently
If you don’t take the time to research the best type of loan for the commercial real estate property you want to buy, then you may end up with a loan that isn’t the best fit for your needs. Take the time to examine all of your options and consider a range of factors before making your decision.
Some of these factors include the amount of documentation you wish to provide, the length of loan’s term, and the prepayment penalty.
For instance, if you only plan on owning the property for a short amount of time, you wouldn’t want to choose an otherwise attractive financing option that also included a prohibitive penalty for paying off the loan early.
In general, it pays to determine how much flexibility you think you will need before conducting the research process. If you think you may not qualify for a bank lending program, you can expand your search early on and improve your chances of approval.
2. Not Investigating All of the Terms of Your Loan
Once you find a commercial real estate loan that looks good, many investors fail to find out all of the terms and conditions and learn about them later, when it’s too late. It’s important to be specific and look into every single condition, so you know you’re getting the best deal possible.
The key is to determine what the best possible deal is for you. Remember that the terms that make sense for one investor may fall far short for someone else. Consider consulting with a trusted third party before making your final decision.
3. Taking Advice from Too Many People
That being said, take care not to solicit advice from too many parties. Sometimes, when friends, family, and other investors find out you are going to buy a commercial property, the advice will start pouring in from all directions. Most of them mean well, but trying to take it all in and determine which advice to follow and which to avoid can be terribly confusing.
There is nothing wrong with having an inner circle to lean on, but too much well-meaning advice can create an undue level of anxiety during an already stressful process.
4. Not Keeping Up with Current Trends
As with anything in the business world, what worked five years ago or even two years ago may not be relevant today. Take the time to investigate current commercial property loan trends and any changes in tax laws, and you may discover a new strategy that works perfectly for your situation.
5. Dealing with Just One Lender
Familiarity and rapport with a lender are important, but that doesn't mean you should ignore other financing options before making a decision. Keep in mind that once the papers are signed it is your loan and you will be responsible for it, so doing some research makes sense.
6. Not Having a Solid Business Plan
Any lender will want to know that you have a strong foundation and a good plan to repay the money they are going to lend. Therefore, take time to craft a sound business plan before you search for the best commercial lender option.
A key aspect of this business plan should be an exit strategy for the loan. This section is especially important if you are hoping to take out a bridge loan.
7. Not Checking the History of a Private Lender
Be sure to do your due diligence on a lender before signing the agreement. Check online reviews and ask trusted colleagues about the lender’s reputation and competency. The goal of this process is to feel confident that the lender will be able to provide the financing you need.
Getting a commercial real estate loan is a big commitment, but it's also an important step if you are going to start building your portfolio. If you can avoid the mistakes listed above, you'll be well on your way. Check out your eligibility and apply now at InvestmentProperty.Loans.