Since real estate is such a large investment, applying for a real estate loan is a more complicated process than applying for a short-term loan. Since you’re interested in a property to be used to generate income, lenders are going to be very interested in seeing a detailed business plan.
The exact information you’ll need to provide on the loan application will depend on how you plan on using the property (example: if your business will be occupying the entire space or if you’re buying a property for the purpose of leasing it out to other businesses). However, you can expect to provide much of the same information that you would need to provide for any other type of business loan, such as:
- Resumes for yourself and your partners or other principal employees
- Copies of business and personal tax returns
- Lists of individual debts and assets
- Income projections for the next 3-5 years
Since you are dealing with real estate, you will need to pay for things like having the property surveyed and appraised. You may also need to have an environmental study done on the land.
Lenders will consider your loan-to-value ratio (LTV), which is related to the amount of your down payment. The LTV is the loan amount compared to the total purchase price of the property. For example, if you’re able to make a 20% down payment, that means the lender would be providing a loan for 80% of the property’s value. In many cases, lenders look for LTVs that are 80% or lower because a low down payment puts an additional risk on the lender.
Another thing lenders will consider is your debt service coverage ratio (DSCR). Your DSCR compares your annual net operating income (NOI) to your annual debts. This helps lenders gauge how much cash flow you are generating. Generally, lenders are more inclined to approve loans for businesses with a DSCR of 1.25 or higher.