4 Keys to Getting Your First Loan
I want to talk to you about how to finance your first deal. It can be quite difficult to get your first loan, but be persistent, think big and stand tall!
When I first started, my partner and I had only $500. But we were rich with our passion, drive and positive attitude. We were going through a lot of commercial real estate deals, analyzing them and learning from universities. All these things helped a lot. It took us almost 10 months to close our first deal.
We started by getting a small loan from a relative. You can start with a little capital. With no real estate background, you can start and move forward.
Securing finances for our first deal was a major hurdle. The housing collapse was fresh. The stock market was fluctuating. Foreclosures were increasing. Many banks around the world were very tightened. They were not lending money in the commercial real estate sector, but fortunately, they were lending to multifamily, which is our expertise.
In our minds, we were low-risk, and we had secured well-paying jobs. We were doing our real estate investing part-time. Our business plan was strong and we had good credit. However, the bankers did not see it the way we saw it.
The lenders always ask, “What kind of experience do you have? What properties do you own?” and other questions. Lenders always want to look into or are interested in your record of accomplishment. We were able to convince the bank that we were starting up but we had looked into these properties we had formulated a plan of attack. That was how we got our first deal.
When applying for your first loan, convince the lenders that you are passionate and well prepared to invest in real estate. Also, show them that their money is secure with you.
4 Keys to Getting Your First Loan
Here are four steps that I recommend you follow in order to get financing.
1. Build Relationships with Loan Brokers
I recommend that you build strong relationships with some loan brokers. They are the people who can open up your horizons – to help you find out what is out there, what kind of loans are available in the area where you are purchasing commercial property. They generally charge a 1% origination fee. You do not have to pay 2%, 1% to the brokers and 1% to the lenders.
2. Build Relationships with Community Banks
We started in the local community banks. We started seeing some officials there and we tried to show them our properties. These local banks are more inclined than big banks to give you a hearing. Your local community bank is much more likely to listen and give you a loan.
3. Demonstrate You Have ‘Skin in the Game’
Be prepared to put your “skin in the game.” Lenders will want to know, “How much are you bringing into the deal?” Lenders are interested in how much you believe in your deal and are willing to invest some of your own money. If you are syndicating, you can use your investors’ capital to demonstrate “skin in the game.” Lenders will be more confident in you and your business plan if they see you are willing to take on some of the risk. Present your deal to them with specifics. Lenders also typically demand that you place a personal guarantee in the deal. Family loans never ask you for a guarantee. However, it will take you a long period to qualify for family loans.
4. Consider a Loan Sponsor in the Deal
You can bring a partner in as a loan sponsor. Loan sponsors typically receive cash flow and equity shares in the deal so that they can qualify to get that first loan with you. You need to seek a partner who may or may not have experience. However, he or she must have a good net worth and liquidity of cash.
Be confident! It is really needed to show your strengths in talking to loan brokers, bankers and others. Your presentation should be professional and thorough. You might not have a lot of experience; however, as the saying goes, “fake it until you make it.” After a few attempts, you will have learned what questions to ask.
Write down these answers so that you can be confident and clear. It will help you erase your own doubts about your inexperience. Look professional and follow up with lenders and loan brokers. Remember that the lenders consider everything before they lend to you. They are giving you so much money and you need to make sure this money is not wasted … that is their biggest worry.
Another Option: Seller Financing
Another option for getting your first deal is seller financing. You should look at some commercial assets where the seller might be willing, even though they might not advertise. Ask the brokers and the sellers. This really helped us when nobody wanted to give us a loan. Lenders are looking for experience, so seller financing is a great way for you to get a first loan so you can start building a record of experience.
Be triumphant, even with just a few properties, because you are setting a trend. Strive to succeed in your first few deals and build a strong record of accomplishment. Your ability to borrow in the future will be based on how well you have succeeded in getting your first few properties under your belt.
Every lender is different, and every borrower faces different obstacles. Do not give up. Keep trying until you get the loan you need. Look into private money, which may be from family, friends and hard money lenders. There are pros and cons of all this.
Conquer your first deal! Start a good trend! And keep on going!