Welcome back to the close more deals podcast. I'm your host, Scott Dillingham. Today, I'm gonna be explaining net operating income and how it can help your client to get approved for their loan. But not only that, it can help you avoid showing tenants or potential buyers properties that they're never gonna qualify for. So what it is, a net operating income is the income subtract the expenses.
Scott Dillingham:Right? That's the net operating income. So in Canada, we have a lot of people that wanna buy businesses. Happens in The States too, but specifically in Canada, the accountants do it's a really nice, like, business financials. It shows the two year summary back to back, like, side by side, and you can see the net income.
Scott Dillingham:Well, how it works is we take that net income and we divide it into a mortgage payment. Now we are looking for a coverage ratio of 1.2. So that means the income has to be 20% surplus over the expenses. And then we find out the max loan that the borrower can qualify for if they're buying a business or a max loan that their business could qualify for if they're buying a building. So when you're buying a building and you have an existing business, potentially, you can finance up to 100% of this.
Scott Dillingham:It all does depend on the loan size, location, business type, and, of course, your overall income. But we have helped many, many investors and business owners qualify under this. Now it's also used for real estate investors. Right? So they'll look at the net operating income of a property to find the coverage ratio, and then that allows the lender to determine the potential value or size of the loan that they're willing to give the clients.
Scott Dillingham:So the net operating income is very important. Now the thing is, and why I keep recommending that if you guys have clients that they speak to a broker, preferably us, I would love that, but they speak to a broker because we just had a client who was purchasing a trucking facility, and his bank was giving him a decent sized loan. It was, almost 4,000,000. And they were only qualifying him over fifteen years because that is their policy. Right now, the trucking industry, and office space is is hard to finance.
Scott Dillingham:It's just the lenders have scaled back kinda what they wanna do. And I think that's part of this bank's reasoning why they're at a fifteen year amortization. So I know of another bank that's at twenty five years. So, we introduced them to them, and the loan size is much bigger. It'll work.
Scott Dillingham:The the size of the loan that the bank was giving, the deal didn't work. The borrower didn't have enough funds. So even though the debt coverage ratio of both lenders is 1.2, we're using the same net operating income per, you know, same client, same same deal because the twenty five year amortization drastically impacted the loan size. So this is something that you more than likely will not know nor will your clients, right, when you just apply with one lender. That's why working with a dedicated commercial team is a fantastic way to guarantee and maximize your approvals.
Scott Dillingham:But what I like specifically, and I don't mind doing it. It does take a lot of time that kinda goes nowhere. But as if somebody is, like, buying a business or a property like this, we will quickly consult with you and the customer over the phone. We'll run the numbers literally again over the phone, and we can tell you within a five minute phone call on the max loan for that property. And, you know, sometimes, you know, people get upset because they really wanted to, you know, they're letting their emotions get ahold of them and they wanted to to buy this this property, even though it's not a good one.
Scott Dillingham:So that's what this program stops. It really stops you from buying crappy businesses, crappy properties. So it's fantastic. And for you as a realtor, if you have your clients go through this first and we analyze the business financials first, then you're not spending all this time putting in offers and things like that. So it'll save you guys a lot of time.
Scott Dillingham:Your success rate will go up, and, obviously, you're gonna close more deals. So I hope this helped. If it did, please like, follow, share, all that good stuff. I really appreciate you guys, and I'll see you next week.