Financing The Purchase - "Show Me The Money"

The due diligence is now complete and it's time to make sure your financing arrangements are in place in order to close. Even though you may have had a pre-qualifying meeting at some point along the way, you need to finalize the actual mortgage terms, rate/term/amortization, and costs which will be incurred in arranging the funds.

In considering sources for financing, one size does not fit all, and especially in commercial lending. Some of the better options might include:

• Primary Bank (established relationship and a lender who already knows you)
• Institutional Lenders (specialists in commercial mortgages)
• Mortgage Brokers (able to shop the mortgage market for you)
• Private Lenders (often in restricted situations and generally costlier)
• Seller Financing (Vendor or VTB held & either as a 1st or 2nd mortgage)
• Assuming Existing Financing (based on an approval)

Beyond the actual mortgage terms, make sure you review the costs associated with arranging it. Such costs may include - appraisal fees, application fees, brokerage fees, and associated legal expenses. All of this should be spelled out in a written "Mortgage Commitment" letter by the lender. Best to consult with your lawyer, should you have any question(s) regarding the MC prior to signing it. Any unwillingness to advance funds on the part of the lender, will affect your ability to close the transaction.

A final word on today's mortgage market (as of February 2016). It is highly competitive and with solid investment properties (ie. good cash flow, stable leases, and a solid Buyer Covenant), you should be in a position to actively shop the market. The low interest rate environmental has help expand the number of commercial lenders looking to fund real estate - meaning more sources to select from. By improving the rates/terms, loan to value amounts etc., you only enhance the property itself as an investment.

Tell us about any commercial mortgaging experiences in your market ... and as always we are just a call/click away, if you would like to investigate investment options (OPPORTUNITIES) in Windsor-Essex.

---

Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434

Positive Cash Flow = Positive Debt Coverage Ratio (DCR)

After you determine an income property yields a POSITIVE CASH FLOW, the next step is to calculate the property’s ability to service mortgage financing costs out of this cash flow.

The standard measurement within the investing world is referred to as the DEBT COVERAGE RATIO (DCR). DCR is simply comparing the property’s net operating income (NOI) to the projected mortgage financing costs – typically on both a monthly and annual basis.

Banks/Lenders typically look at DCR closely, wanting to confirm that the cash flow is sufficient to cover the related debt cost (aka monthly mortgage payment). In fact, most often they are looking to see a positive margin, which exceeds the mortgage servicing costs.

Source: Politico

Using a ‘break –even’ analogy, if the cash flow just meets the debt service costs - this would be a simple ‘break even’ outcome.

Consider the following illustration:

Property 1 
Net Operating Income - $75000
Mortgage Costs (Debt) - $50,000
DCR – 1.5

Property 2
Net Operating Income - $45,000
Mortgage Costs - $50,000
DCR - .9

*All $ amounts are annual

In the case of property 1, the cash flow exceeds the funds required to cover the mortgage requirement. In the case of property 2, a deficit is created ($5,000) which is not only an annual loss, but creates a negative return on actual cash invested.

In layman’s terms, a DCR of (1) is a ‘break-even’ - a DCR of (1.5) is ‘positive’ - a DCR of (.9) is ‘negative’. For investment purposes, this is how you should approach your analysis.

Just a final word on the bankers/lenders, you’re ability to negotiate favourable mortgage terms are clearly impacted by the property’s DCR. This gives you some insight as to how they evaluate risk in underwriting mortgages and how it ultimately impacts your proposed purchase.

How are lenders approaching DCR in your area? How does it affect rates offered and other terms proposed? 

Feel free to reach out to us, should you have interest in the Windsor-Essex market. As always, appreciate any feedback in the comments!

---

Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434