Sized on the building's income
A commercial investment property is a building you buy for the rent: a strip of shops with several tenants, a small office building, a warehouse with two occupants, a mixed-use building with apartments above a storefront. The lender's first question is not what you earn. It is what the building earns, and whether that covers the mortgage.
Two measures do most of the work. Net operating income, or NOI, is the rent the building collects in a year minus the cost of running it: property tax, insurance, repairs, management and an allowance for empty space. It is worked out before any mortgage payment.
The debt service coverage ratio, or DSCR, is that net income divided by a year of mortgage payments. A ratio of one means the rent exactly covers the payments. Lenders want it comfortably above one, so there is a cushion if a tenant leaves or a roof needs replacing. Each lender sets its own floor, and the floor shifts with the property type.
Your own finances still matter. The lender looks at your net worth, your other properties and your experience as a landlord. But on this kind of property the building has to stand on its own first.
What goes into the loan amount
Every lender runs two tests and lends the lower result.
| Input | Where it comes from | What it does |
|---|---|---|
| Rent roll | The list of tenants, units, rents and lease dates | Sets the gross income the lender starts from |
| Vacancy allowance | The lender's own assumption for empty space, whatever the building shows today | Reduces the income the lender will count |
| Operating costs | Two years of the building's statements: tax, insurance, repairs, management | What is left is the net operating income |
| Qualifying rate and amortization | The lender's test rate and repayment period, often stricter than the contract terms | Turns the net income into the payments it can cover |
| Coverage floor | The lender's minimum ratio of net income to payments | Caps the loan the income will support |
| Appraised value | A commercial appraisal by one of the lender's approved appraisers, paid by you | Sets the ceiling as a share of value |
| Loan amount | The lower of the income test and the value test | What the commitment letter offers |
No figures here on purpose. The floors and shares differ by lender and property type, and we put the ones that apply to you in writing before you write an offer.
Lease audits and rent rolls
The rent roll is the seller's summary: who rents what, for how much, until when. The lender does not take it on trust. It reads every lease and checks that the rent, the term, the renewal options and who pays the operating costs match the summary. We do that check before the lender does, so there are no surprises in the commitment letter.
Things we look for: leases that have expired and run month to month, rent that steps up or down part-way through, free-rent periods, options that let a tenant leave early, and whether the lease is gross (the landlord pays the building's costs) or net (the tenant pays its share on top of rent).
Most lenders also ask each tenant to sign an estoppel certificate: a short form confirming the lease terms, the rent paid and that there is no dispute with the landlord. We tell you early which tenants will need to sign so the seller can arrange it.
When leases expire together
A building with five tenants spreads the risk, but only if the leases end at different times. If three of the five expire in the same year, the lender sees a year in which most of the income could walk out the door at once. It may count less of the rent, ask for a larger down payment, or shorten the term so the mortgage renews when the leases do.
Ask about this before you write an offer. Sometimes the fix is simple: the seller renews a tenant early, or a lease with an option to extend is exercised before closing. Sometimes the answer is a lender that is comfortable with the building as it stands. Either way, you should know before the appraisal is ordered.
The same thinking applies to one large tenant. A building that depends on a single anchor is sized on how strong that tenant is and how long it has left on its lease.
- 1
A short call
Tell us about the building, the tenants and the price. We run the two tests on the seller's numbers and say what loan is realistic before you make an offer.
- 2
Documents, then the application
Rent roll, leases, two years of the building's statements and your own financials. We send the lender a written summary of the building and the tenants, not just a form.
- 3
Commitment letter
The lender's written approval with its conditions: the appraisal, an environmental report, estoppel certificates from tenants, insurance and the lawyer's work.
- 4
Clearing conditions
The appraisal and environmental report are ordered, the estoppels are signed, and we answer the lender's questions. You hear from us as each condition closes.
- 5
Lawyer and funding
The lender instructs your lawyer, the leases are assigned to you at closing, and the money moves on the completion date.
Documents for an income property
The building's papers first, then yours.
- Rent roll: every tenant, unit, rent and lease expiry
- A copy of every lease, with any amendments and renewals
- Two years of operating statements for the building
- The current property tax notice and insurance policy
- The accepted offer, or the current mortgage statement on a refinance
- Any appraisal or environmental report that already exists
- A personal net worth statement, and company financials if a company is buying
- Two pieces of ID for each owner, front and back
The full document checklist by client type, and how it works from the first call to funding.
Costs are gone through with you upfront, before you commit to anything; the appraisal, the environmental report and your lawyer are paid separately. Buying the unit your own business will occupy instead? See owner-occupied commercial, or Book a 20-minute call →