Janice: Patrick and I were wondering if there’s more we should be focusing on financially to prepare for our first property purchase, beyond just saving for the down payment. Are there specific steps that can make us more appealing candidates for a loan or even give us more leverage?

Alexandria: Janice, that is a great question. Here are my thoughts on some initial financial steps you can take to prepare for your first real estate investment and make yourself more attractive to lenders:

Build a relationship with your lender. Lenders put an emphasis on your relationship with their bank, which includes your history there and the amount of deposits that they hold. I’d suggest talking with the bank you currently use to see if they offer favorable terms for commercial real estate loans. Be sure to specify that it is a CRE investment acquisition loan. Almost all banks do SBA business lending, and the loan brokers call them CRE loans since they can be used to purchase owner-occupied loans, but it is not until you start asking specific questions that you realize they are referring to SBA loans. If your lender doesn’t typically loan on CRE, or seems like they have unfavorable terms, then maybe consider moving your deposits and banking somewhere that does a lot of CRE loans. Having a good relationship with a lender can sometimes result in better terms or quicker approval processes.

Establish a cash reserve. The down payment is very important to save for, but you don’t want to deplete your deposits. The bank will require you to have a certain amount in your account for unexpected expenses. Additional cash or liquidity beyond the down payment will be required and that minimum will vary from bank to bank, but the lender will likely tell you what it needs to be for them.

Visit with your accountant. It is a good idea to visit with your accountant beforehand, for many reasons. You might want to start getting your financial reports in order, and prepare for all the questions and documents the lender will ask for. This could be a good question to ask your lender, what you will need your accountant to prepare.

Understand your budget. Determine what your budget will be – remember that a down payment is typically much higher for commercial properties, so expect a 30-40% down payment. What is the highest purchase price you will be comfortable with? You may want to consider reducing any existing debt to improve your debt-to-income ratio, which is a key metric lenders use to assess the loan application.

Consider a partnership. If you are open to it, explore the possibility of forming a partnership. Do you know anyone who may be interested in investing with you? If you are able to find someone with a little experience or additional capital, you may be able to obtain more favorable debt terms. This could provide additional financial strength and make them more attractive to lenders, especially if they partner with experienced investors.

Build experience. Lenders look at more than financials, they will want to know your experience with a particular asset type. If you don’t have experience investing in a particular property type, some clients will partner with industry professionals to make lenders more comfortable.

Understand the market. You may want to spend time educating yourself on the commercial real estate market, including current trends, property values, and rental rates. Being knowledgeable about the market can make you more confident and better prepared when negotiating with lenders and sellers.

These suggestions can help you not only prepare financially but also increase your chances of securing favorable loan terms and making a successful first investment.