It is important while trying to obtain an investment property loan to know about the three ratios unanimously used by commercial lenders. These ratios are: the loan-to-value ratio, the debt coverage ratio, and the debt ratio. |
One of the first things you will need to do in order to establish your property investment business is to obtain your first property investment loan. While most people have experience with their own residential property loans, obtaining an investment property loan can be a bit different as these types of loans come with a few extra challenges.
The first challenge is often that the amount of money you are looking to borrow is likely higher in an investment property rather than your residential property. The second concern for to consider is not only your personal debt ratio but also the debt coverage ratio as well.
While commercial and residential loans are essentially the same animals, they have separate factors used to determine your eligibility to close on the loan. If you take a bit of time to learn the other factors that commercial lenders take into account, you will be well on you way to obtaining your first property investment loan.
Part of doing your homework, prior to talking to a lender, is to understand that there are three common ratios which commercial lenders all use to judge the risk of an investment. If you are educated about these ratios you can come to the table with your lender in a better position because you are better prepared. Your preparation will make them more likely to do business with you.
The first consideration your lender will want to look at is the loan-to-value ratio (LTV). The LTV is the same as you might associate with residential lending. It is simply the total debt on the property in comparison with the property's current market value. If you own a home which has a current market value at $100,000 and a mortgage of $80,000, then your LTV would be 80%.
While residential lenders are okay with lending at 80% LTV or higher, most commercial lenders use a standard of 75% LTV as the least they will generally lend on.
The second consideration will be your project's debt coverage ratio (DCR). The DCR tells the lender how much income the property is producing when compared with the cost of the total debt on the property. The DCR is calculated by taking your net operating income and dividing it by the total of all of the mortgage debt on the property.
Most lenders require a DCR of at least 1.2 in order to lend on an investment property. A DCR below 1.2 indicates to the lender that the property is probably going to lose money.
The third consideration will be your own debt ratio. If you own a small company, you will be required to submit a personal financial statement as a guarantee on the potential loan. This debt ratio will be your own personal monthly housing expenses divided by your own personal monthly gross income. Your debt ratio shows the lender how you manage your personal finances and if you can afford to guarantee the investment property loan. Most commercial lenders will not lend to you if your personal debt ratio is above 25%.
While your lender will help you through the process of obtaining funding, the more you prepare for the process the better. By being prepared, both you and your lender will have a much less stressful time funding your project.
** About the author :
As a professional realtor interested in switching to larger commercial real estate, property investment loan specifics are one small part of the KISCL property analysis program. KISCL, http://www.kiscl.com/, has all of the tools and resources of seasoned real estate pros to help you make the switch to commercial real estate.
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