Underwriting 101: What Investors Need to Know About Underwriting for Hard Money Loans

A hard money loan is based on the value of a specific property. Determining that value is part of the underwriting process. Understanding how underwriting for commercial hard money loans works can be crucial for investors, helping them avoid costly mistakes.
To that end, here’s a look at:

• How commercial property valuation works in the underwriting of commercial hard money loans
• Why good underwriting matters

Calculating Commercial Property Value

The value of a commercial property being used for a hard money loan impacts the loan amount. To figure out this property value, an underwriter will:

• Determine the property’s income:

  Commercial properties essentially have “jobs,” with income in the form of rent. The income will be the revenue the property generates minus expenses, like repairs and property management fees.

• Determine the cap rate:

  This is the property’s expected rate of return.

• Plug these values into an equation:

  Usually, the software automatically performs the calculation once the necessary factors have been entered

The cap rate is where things can get tricky because this is where an underwriter has to use some judgment—and, of course, different underwriters can make different judgments, based on experience (or a lack thereof).

Calculating Cap Rates

Unlike the property income that’s verifiable via receipts, rental agreements, and other documents, cap rates are more conceptual. They reflect both the expected return on investment (ROI) and the risk.

The higher the cap rate:

• The greater the risk is, which usually means an investor will be looking for a higher ROI.
• The lower the value of the property will be.

Underwriters typically look at cap rates for similar properties in the area when determining the cap rate for a given property. While this can be a useful tactic, it’s essential to remember that:

• Caps rates change:

  As property conditions change, so can cap rates. For example, certain types of tenants or the loss of tenants can impact a property’s cap rate.

• Mistakes can and do occur:

  These mistakes can cost investors their initial investments, as well as cause property foreclosures, lawsuits, and more.

The Importance of Underwriting

Given how costly underwriting mistakes can be, it’s critical that:

• Underwriters don’t rely too heavily on automated software and canned cap rates.
• Properties are inspected by both investors and lenders during the underwriting process.
• Investors worked with an experienced underwriter.

Contact COHI Capital for Commercial Hard Money Loans in Colorado

COHI Capital is a premier hard money lender in Colorado. For more than a decade, we have been fundingcommercial hard money loans for retail spaces, industrial properties, office buildings, and several other types of commercial properties.

Call 970-922-3277 or email us now for more information about our commercial hard money loans for Colorado properties.

With a streamlined application process and responses within one business day, COHI is the lender you can trust for fast, flexible financing solutions, backed by honesty, transparency, and fair pricing. Plus, from the initial application through the final decision, you will always deal directly with the lender making the decision, not a broker.

From offices based in Denver, CO, COHI funds Colorado hard money loans, from $50,000 up to $3,000,000, for properties throughout the Denver metro area, the Front Range, the I-70 Corridor, and beyond.