Waad Nadhir – Differences between Commercial and Residential Financing

Waad Nadhir has been in the real estate business since 1989 and is an expert when it comes to real estate financing.

There are two big differences between commercial and residential financing of properties.

Lenders look at residential properties as personal residences. To qualify for a residential property loan, you need to show your creditworthiness first.

Lenders view commercial properties differently. They know that a commercial property is a place of business, which is why they are first interested in the ability of a commercial property to generate income. Your primary goal when seeking to finance for a commercial property is to show that it will bring more income than it will take in expenses and mortgage payments. Your personal qualifications come second. This means that in certain situations you may have less than ideal credit history, but your income-generating property may allow you to get a loan.

Another difference between commercial and residential real estate has to do with the down payment amount. Commercial properties typically require a down payment of at least twenty percent of the purchase price. Zero-down loans and mortgages are almost unheard-of in the commercial real estate industry. In addition to this, because the loans for commercial real estate are usually much bigger than the residential loans and the risks are higher, the rules are much stricter.

When analyzing the income from a commercial real estate property, lenders look at debt coverage ratio and loan-to-value ratio.

Debt coverage ratio is the ratio of net operating income from the property to the debt payments. Fundamentally, this ratio shows whether the property is bringing enough money to cover the debts for which it serves as collateral. The loan-to-value ratio compares the appraisal value of the property to the loan amount. A typical loan-to-value ratio incorporates the income strength of the property and the financial health of the buyer. While experienced real estate investors like Waad Nadhir may be able to make a deal because of their reputation, newbie investors need to pay very careful attention to the numbers.

 

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Author: Waad Nadhir

Waad Nadhir got his start in the business investment world after he earned his MBA from the University of San Diego in 1983. A citizen of the United States since his family moved from Iraq when he was just five years old, Nadhir is now the President of BOSC Realty Advisors in Bloomfield Hills, Michigan. He spent most of his childhood growing up in Detroit.