Investors and brokers have more choices than ever when deciding where to go to get a mortgage for an investment property. There are many differences between working with a private lender and a traditional lender, especially when looking to buy an investment property versus buying a home. One of those differences is that for buying a home, the lender takes a much harder look at the borrower in terms of their debts and their credit history. A lender looking at a commercial loan, on the other hand, is more concerned about the asset than they are the investor.
Alan Rosenbaum is the owner and CEO of Guard Hill financial, a 27-year old mortgage lender headquartered in New York City. He says that on the commercial or investment side, the most important aspects come from the property itself: the net income from the property, based on revenue and expenses. Because commercial loans are a little less regulated, “there's a little bit more wiggle room on the side of the lender as to what they will do and what they won't do.” Rosenbaum said.
Being prepared with the hard figures is easy enough, but for investors new to the space, there are other factors they need to consider, such as their goals and how the property in question can help them achieve their goals. A private lender will look at their strategy and whether or not the property will be the best deal for the investor’s situation. In some cases, partnering with someone more experienced can help a lender prepare faster and without making the typical first-timer mistakes.
“Some people buy investment properties for cash flow, some people buy investment properties . . . for price appreciation,” Rosenbaum said. “Different investors look for different things. But obviously, you would want to see the price appreciate, and you would like to see the cash flow increase as well. So you need so you need to have the facts, you need to know what the expenses are, and where the market is, to see where you are and try to determine where you think it's going to go. It’s not for the inexperienced,” Rosenbaum said.
Just because lenders look closer at the desired asset on a commercial deal doesn’t mean that lenders don’t consider the principals involved in the deal at all. In fact, some institutionalized lenders are required to do so. Toby Potter is the CEO of Global Integrity Finance, and he says that a lot of inexperienced investors don’t understand why there’s any consideration of their personal history. The truth is that an investor’s credit rating can really provide the lender with more information than simply whether or not they pay their debts on time. It can help in determining even more insight into the investor’s motivation for the deal.
“We have to make sure that you’re a viable individual that makes good decisions, and number one, your credit tells us whether you make good decisions,” Potter said. That includes looking beyond an investor’s record with investment properties, but also with making payments on their own home, their car, their credit cards; the things they have to pay to keep moving through life easily.
“If you don’t [pay], then those things get removed, and if they’re not important to you, then this deal, when the going gets tough, is not going to be important to you,” Potter said.
Investing in property is a business, and there has to be some sort of indication that the investor has a stake in their business and are prepared for their own success, Potter said. Part of that preparation means getting their ducks in a row on the back end with their personal credit and ensuring they’ve positioned themselves as someone with a great track record of good deals—or even partnering with someone who has that track record. Part of that preparation is also knowing the particulars of their deal inside and out, knowing their bottom line and how the property can deliver those results. And part of it is working a with a mortgage specialist that has the right product for their situation.
“As a specialist, since our overhead is low, and we're not a huge conglomerate spread out all over the country with all these ridiculously high fixed costs, we can operate as an advisor, as a specialist and custom-tailor mortgages to the individual's specific credit profile,” Rosenbaum said. “There's a lot of intricate and sometimes ridiculous guidelines but you have to know what the rules are. You have to play within the rules. So at least if we know what the rules are, we can guide our clients.”