What Everybody Should Know... About Commercial Financing!

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What Everybody Should Know... About Financing Income-Producing Commercial Properties!

Whether you’re new to commercial investing or have been doing it for a while, it is easier if you know a few of the secrets about financing income producing commercial properties, like why Bigger is often Better! Now, you may already know a lot about it… or just a little. In either case, there’s more to learn. Believe me!

If you’re just starting out, great! Keep an open mind. If you’ve been doing it for a while and want to see if there’s a way to improve on what you’ve been doing, that’s wonderful. But you, too, need to keep an open mind, because there’s more to learn. So let’s get started on making you some more money!

When I’m talking about commercial properties, I’m primarily talking about properties of more than 20 apartments, a commercial office building, a strip mall, or something larger. But since you’re probably familiar with apartments, whether it’s a triplex or larger, let’s focus on apartments. One of the reasons for having at least 20 apartment units in a complex is to allow you a lot better protection and control. If you have one vacancy, it only represents 5% of your income where on a single-family home, you’re 100% in the hole every time you have a vacancy. That’s no fun. Ask me how I know!

As a former residential investor, I got tired of dealing with tenants on my single-family properties, even though, in my case, most were supposed to be set up for lease-purchases. Sometimes, tenants would back out and I’d have to start over. Sometimes, the tenants wouldn’t pay on time and had me scrambling around to pick up their slack. After all, if they didn’t pay, does that mean we don’t need to pay the mortgage? Then, what about the messes and having to fix up the house again for a new tenant/buyer? So, as I said, if you’ve got 20 units, it’s not such a big headache. The other reason is that with 20 units, you can afford to give one to an on-site maintenance/management person. This will take a load of work off your hands, still give you the tax benefits, and free up your time to buy more properties. But what about financing them?

Well, you could go to a bank or mortgage company for the financing, get out those tax returns, get ready for them to get into your credit again, … and then the waiting game. As painful as that sounds, it really can be, IF you continue to stay in small properties where you have some limitations on financing choices, i.e., put 10-20% down and either owner finance or bank finance the rest at a fairly strong interest rate and with personal guarantees. Even if you’re able to get 100% financing, that won’t be enough to handle the closing costs.

But here’s another secret to commercial financing: Buy BIGGER Properties! Why? Because lenders will then look at the property and the transaction more than they will look at you personally. When you’re dealing with larger Commercial Properties, Lenders want to know that the property will stand by itself. To get into this level, we’re talking about financing more than $2.5 Million in real estate – and it’s easier above $5 Million. Don’t let the numbers worry you! You won’t even need to sign for the money personally. It’s called non-recourse financing! You borrow the money, but they look to the property to make sure it can cash-flow enough to pay all the bills, pay the mortgage payments, and pay you a reasonable cash profit – like 20% or more. They want to know that you can play in the game, but you can do that by putting a team of professionals together with you as the team leader.

What you should know is that as leader of a professional team, they won’t be expecting you to write a check out to them if something goes wrong… They won’t be coming to get your children, your house, your dog, or your car… That’s what non-recourse loans are about. They just want to know that the property will stand for itself and can pay for itself. One way to demonstrate this in your package is by evaluating the rental numbers:

[b]Number of units x Rent/ month x 12 = Gross Potential Annual Income
Less Vacancy Factor (5% is typical) = Gross Income
Less Expenses, including management (35-40%)
= Net Operating Income (NOI)[/b]

NOI divided by Annual Debt Service should give you a figure of 1.18 or larger (Although some may want you to be at 1.25 or better, we have programs at 1.18 for existing properties and 1.10 for new construction). 1.18 means that you’re expecting to bring in 18% more than it takes to run the property and pay all the bills.

If you’ve been playing the ugly-house game of buying and fixing up properties, consider using that same amount of money to leverage a 92%-102% purchase of commercial apartments or office buildings!

To your investing success,

Kelvin