The rage on TV now is to buy investment properties. On most of the shows, the investors fix up the property and flip it, meaning they immediately turn around and sell it for a profit. However, another side of purchasing an investment property is holding on to the property and using it as a rental for a commercial business. Either way, it’s still an investment property.
Since purchasing investment properties has become so popular in the last couple of decades, so have commercial real estate loans to purchase those investment properties. Unless someone already has the cash in the bank ready to make an investment, they will be needing to secure a loan in order to complete the purchase. And like anything, there are mistakes that can be made when choosing commercial real estate and a real estate loan. This article will focus on avoiding those mistakes so you can confidently and successfully choose and secure a commercial real estate property and loan without encountering some of the more common problems.
Conventional or Unconventional Loans
If you want to keep your investment property for a long time as a rental, you want to stick with a conventional fixed-rate mortgage of 15, 20, or 30 years as opposed to an unconventional adjustable, variable, or interest-only loan. The fixed-rate loan’s interest rates won’t change throughout the life of the loan, but they will for the other three unconventional loans mentions. Those three (adjustable, variable, interest-only) are tempting because they offer lower rates initially, but they can go up. If you don’t plan on keeping the investment property for a long time so you can flip it, the three non-fixed loans are probably better choices because they have lower interest and can save you money.
First, Do the Math.
A property investor absolutely must exercise due diligence when searching for investment property and choosing a loan for the property, because not all properties are the same. There is an almost unlimited number of reasons why a property can be a good or bad investment. Before choosing a loan for a property, investors must crunch some numbers. How much can they afford? What do they hope the net profit will be? What monthly payment are they willing to pay before flipping the property or receiving rental income? How much will it cost to renovate the property, and how long would that take? How quickly must you sell it to make the desired profit? If an investor with limited experience does little or no preparation in advance, there is a good chance they will financially come up short of what they had hoped.
Be Knowledgeable
Perhaps you have already heard this, but it is worth repeating. Be knowledgeable. Before taking a risk on your hard-earned dollars with an investment property, do everything you can to learn about all the risks involved with investing in real estate property. Especially now when a computer can give you all the information you could ever need about purchasing investment properties, there is no reason not to do all the research you can. Would it help to talk to other real estate investors? Of course! Once you do your research, don’t step into an investment property transaction thinking you know everything, because you don’t. If you need help, ask for it from a reliable source, and definitely consult with your lender. They probably know more about investment property ventures than most people, and they can give you good advice.
Expect the Unexpected
We have all heard the phrase “Expect the unexpected”. This is especially true when purchasing investment properties. Anyone who has ever watched HGTV knows this because something unexpected will inevitably show up resulting in the contractor calling the owner to ask for more money. Even though the previous owner must sign something stating they had disclosed any known problems, there are still problems they may have not known about. And foreclosures can be a Pandora’s Box of unexpected problems. A water line maybe has a leak from a rusty pipe, there may be a new discovery of a previously unseen termite problem, or codes could have changed through the years requiring necessary work. If an investment property owner doesn’t have the necessary funds to cover these unexpected problems, they can find themselves in a financially scary situation.
Choosing the Right Investment Property Loan
Unconventional loans are more suited for investors wanting to renovate and flip a property. These loans are easier to get, funding is provided more expeditiously, and the interest rates are initially a little lower. Conventional loans take longer, are more difficult to obtain, have stricter requirements, and require a larger down payment. The five most primary types of loans for commercial properties include commercial hard money loans, traditional commercial mortgages, commercial bridge loans, SBA 7(a) loans, and CDC/SBA 504 loans.
If you are a newcomer to the commercial rental property market, be sure to do your homework and consider all possibilities for the type of property you want to invest in, seed money, and type of loan you need, and be ready for the unexpected problems that could pop up. Flipping properties or renting commercial properties can be a lucrative business, but a wise investor would be armed with all the knowledge possible before diving into that market.