Tips For Smart Commercial Real Estate Investing
Investing in commercial real estate can be a very profitable and exciting venture. Most times, real estate tends to be a safer investment than many other options, especially if you have the time to ride out any market dips. Before you start investing heavily in commercial property however, it is wise to do some research and learn all you can about the best way to invest. Here are some tips that should make the process go more smoothly:
Find a Mentor
Make friends with an experienced commercial real estate investor. That person will be able to give you free advice about the do’s and don’ts about real estate management and investing. Why make mistakes that someone else has already made? Ask your mentor about the pitfalls and the things to watch out for. That person can also answer smaller questions about property management as they come along.
Look for Return on Investment
The commercial property you buy is intended to make you money, so make sure that you only consider purchases that are worth your while. You should be sure that you can fill the building with tenants and that the going rent rates will create enough income to pay for the monthly mortgage and then some. This means finding a commercial property that is in a good location, easily able to attract renters and other business if applicable. It should also be a building that will require minimal repairs that will cut into your bottom line.
Make a Plan for Repairs
All buildings require maintenance and repairs. This costs money. Be aware that older buildings are prone to more repairs and more replacement maintenance because their plumbing, heating, and other elements are much older and worn out. However, even newer building will need routine maintenance on things like the roof and the grounds, as well as unexpected repairs. Before you buy, be sure that you have enough liquidity to afford both the commercial property loan and the costs of keeping the building up to code and functionality. Make a plan for when and how you will take care of the needed maintenance.
Build Your Investment Property Portfolio Gradually
When you start investing in real estate, the best strategy is to buy just one property at a time and get each one running smoothly and effectively making a good profit before making the next purchase. You will need all of your attention to put into managing one property and getting it to be a well oiled machine. Once the first is basically taking care of itself, you will have the time and focus you need to add additional commercial properties to your portfolio.
Get Protection on Your Investments
Insurance is essential to protecting your commercial properties, but you also need to legally protect your assets. Talk to a lawyer and make sure that your real estate is not connected with your personal property and that each investment is separate from the other, ensuring that they are not legally bound together in case you should incur a lawsuit against any one of them.
You can find great success in commercial property investment if you just learn the tricks of the trade and take it at a slow and steady pace!
By: Andrew Stratton
About the Author:
Investing in commercial real estate doesn’t have to be as scary as it sounds. For advice when seeking Hendersonville real estate investments, consult the professionals at Preferred Real Estate Center. To consult them, log on to http://www.preferredrealestatecenter.com.
Categories: Commercial Property Investment Tags: Free Advice, Liquidity, Market Dips
Commercial Mortgage Lending – Green Projects Get Funded
Like it or not, environmentally conscious, or “green” principles have come to dominate the field of commercial real estate development and commercial mortgage lending. Green building and sustainable design are now the standard in new commercial construction and residential developments. And, with local and national governments getting greener all the time, look for energy and resource efficiency to become mandatory, with green mandates being placed directly into building codes. Funding sources such-as banks, Wall Street brokers, insurance companies and hedge funds, are following suite and these principles are rapidly becoming a part of the commercial mortgage industry.
The US Department of Energy’s Center for Sustainable Development recently reported that 40% of the entire world’s energy supply is used by buildings. That’s a huge number. And, in the United States, construction accounts for our largest manufacturing sector, representing a staggering 13% of US GDP and nearly 50% of total wealth creation. Even tiny percentage gains in efficiency can amount to massive over-all energy savings.
Both institutional and private lenders as well as the REIT, (Real Estate Investment Trust) hedge fund and private equity industries have all embraced the environmental building movement. Green is the color of money and green is the color of commercial mortgage construction lending now and into the future. Lenders love green construction because good for profits as-well-as being good for the planet. Energy costs money, resources cost money and cleaning up messes’ costs money. Saving energy, saving resources and sustaining a site all save money, during construction and throughout the operational life of the property. Lenders know that green means efficient and, when they evaluate a project for financing they want to be assured that the funds they invest will be used cost-effectively and that the building will be economically viable.
Environmentally sound buildings can cost substantially less to operate than comparable buildings that disregard such efficiencies and tenants and their clients report higher customer satisfaction rates when doing business in them. To a lender, whose capital is secured by the building, this translates into higher quality collateral and makes their investments more secure.
As a commercial real estate investment banking professional, I can attest to the fact that developers who choose designs that are not green will find it very difficult to raise capital or secure loan approvals for their projects. We are in the midst of a sever liquidity crisis; construction money is in short supply. Lenders are giving priority to green development leaving very little capital available for conventional construction.
The Federal Government’s LEED (Leadership in Energy & Environmental Design) rating system awards silver, gold and platinum certification to buildings that reduce waste and save energy and lower costs. LEED certification is almost (although not officially) a mandatory requirement in-order-to get a big construction project funded today.
Being green is no longer just the passion of the activist anymore; it is the new emerging standard in commercial construction as-well-as commercial real estate finance. Investors and developers who need commercial mortgages will do well to pay attention to this trend.
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Categories: Commercial Property Investment Tags: Private Equity Industries, Private Lenders, Resource Efficiency
Commercial Real Estate Investors Need to Examine New Commercial Second Mortgage
Commercial real estate investors that are involved in renovation projects and or actively seeking new acquisitions should take a hard look at the new commercial second mortgages that have become available. This commercial equity loan can create a significant amount of liquidity in investor’s existing commercial equity. Equity th at was previously dormant can now be “tapped” and used in other projects.
The most common uses that we see investors employ with this loan is as property rehabilitation capital or as down stroke capital for new building acquisitions. Investors that have been involved in traditional commercial construction loans understand the extensive process/reporting requirements and like the idea of avoiding this, by pulling cash out of another property via a commercial second mortgage and use those proceed as the rehab capital on a another property.
Likewise, many investors do not want to tie up cash into an acquisition. Investors can pull cash out of an existing property and use that capital as the down payment on the new purchase, effectively buying the property with 100% leverage.
The concept of a loan that sits in second lien position is certainly not new, but is rare. The vast majority of banks would never sit in second position especially if they do not hold the first mortgage. Said in another way, the significant point of the new commercial second mortgage is that it sits in second lien position behind any existing first mortgage, regardless of the underlying bank/lender.
The other major benefit of the Commercial Second Mortgage, (which will be hard to believe) is that the funding bank incurs the third party costs directly. The borrower does NOT have to pay for an appraisal, title, environmental or any other types of upfront fees. The borrower literally has no cash into loan with the only fee being an origination fee of 1% to 1.5% depending on the loan amount.
Investors need to examine their equity positions to determine if this is an option. The program is limited to a combined loan to value of 75%.
For example, if your existing first mortgage is at 50% loan to value you would be eligible for a 25% loan to value second mortgage. Also, there is a combined debt coverage ratio limitation of 1:1.25. Other requirements include needing to own the existing property for at least one year and the borrower needs a minimum credit score of 680 to qualify (among other less important requirements).
As far as the negatives, by far the most common complaint is the loan is capped at only $500,000 and the property value cannot exceed $3,000,000. Not surprisingly, the interest rate is higher than a typical bank loan and is heavily influenced by the borrower’s credit score.
Another negative is that expenses on the property are taken off the owners schedule E or 8825’s of their tax returns which, for obvious reasons, are typically reported higher than what they really are.
Despite these restrictions the overall program can be an outstanding tool for commercial real estate investors to unlock equity and use these proceeds to grow their overall commercial real estate portfolios.
Categories: Commercial Property Investment Tags: Lien Position, Renovation Projects, Second Mortgages