Non-owner occupied commercial property is hard to finance with local banks. Banks generally avoid funding non-owner occupied commercial properties because they consider them significantly riskier compared to owner-occupied properties, as the owner’s direct financial incentive to maintain the property and ensure rent payments is reduced when they don’t occupy the space themselves, making it more likely for the bank to lose money if the loan defaults; this means banks typically require higher down payments and stricter loan terms for non-owner occupied commercial real estate.
Key points about why banks are hesitant to fund non-owner occupied commercial properties:
Higher Risk of Default: If a tenant leaves a non-owner occupied property, the owner might struggle to find a new one quickly, potentially leading to missed loan payments and default on the loan
Less Skin in the Game: Unlike an owner-occupier who directly uses the property for their business, an investor in a non-owner occupied property may have less personal stake in maintaining the property’s value.
Dependence on Rental Income: Loan repayments for non-owner occupied properties rely solely on rental income, which can fluctuate depending on market conditions and tenant stability.
Stricter Lending Criteria: To mitigate the higher risk, banks typically require larger down payments, higher credit scores, and more stringent debt-service coverage ratios for non-owner occupied commercial loans.
Options investors have to purchase investment properties:
Conventional Loan: Banks can provide a commercial mortgage usually 10 years but is amortized to 25 years. This is typically priced the best but takes the longest and is hard to secure if it’s not occupied by the investor.
Buy for cash: Purchase for cash and don’t place any debt on the property.
Owner Financing: If the owner is willing to carry the loan for an amount of time, this can be done fast and without underwriting that banks require.
Bridge Loans: This is an asset based loan that have rates around 10% and need to be paid off in 1-2 years. These loans can be very large in the tens of millions. Creditors will look at your background and take your personal experience into consideration.
Hard Money: This group is asset based only and look at the appraised value of real estate asset and not your credit or income history. It is more expensive than a typical bridge loan.
The best option for investment property is called a DSCR Loan or Debt Service Coverage Ratio.
DSCR Loan: A DSCR loan allows real estate investors to secure financing based on the rental income of a property rather than their personal income. If you cannot qualify for a conventional loan, DSCR loans are a great option. DSCR stands for Debt Service Coverage Ratio.
DSCR = Net Operating Income / Debt Service
Typical DSCR loans require this ratio to be 1.25.
Instead of using income to qualify a real estate investor for a loan, mortgage lenders will look at the DSCR ratio. This ratio gives lenders insight into whether or not a borrower will be able to use the rental income from the property to cover their monthly loan payments.
There is no limit to the number of DSCR loans you can qualify for. This means that investors who own multiple real estate properties can take out multiple loans to generate income from many tenants. This feature makes this a flexible option for beginner investors as well as seasoned real estate professionals.
Benefits of DSCR Loans:
• Personal Income tax statements are not required
• No income verification
• No limit to the number of properties that are invested into
• Different types of properties and asset classes are considered
• No reserves are required
• Quick applications
Select Capital has a very aggressive DSCR lending platform and may assist when other DSCR lenders or banks can not underwrite.