Private Money Formula for Commercial Property Investing

Once in the residential investment business, most investors quickly grasp the upside potential of commercial property investing. While residential real estate is a profitable business, there is more serious money to be made with commercial property investing.

When it comes to commercial real estate investing, you have many more options than with residential investing. Commercial property investing can involve retail space, offices, warehouses, multifamily apartments, etc. Many investors graduate from single-family homes to multifamily apartments as a natural progression in the residential renting niche.

Funding for Commercial Property Investing

This is the part about commercial property investing that most astounds me today. The fact is that the market is ripe with all kinds of motivated sellers in the commercial market. Investment property owners that have been trying to sell for months and even years but can't find a buyer (think motivated seller). Especially a buyer with creative financing to get the deal done. Something to keep in the forefront of your mind is that commercial investing allows for more creative financing solutions. As the buyer, both you and the seller are more sophisticated investors and typically more open minded to creative financing than traditional single-family home sellers. Private money combined with seller financing is often key to commercial property investing.

Let's begin by understanding one of the main chasms in commercial property investing. One segment of commercial properties involves tens and hundreds of millions of dollars to invest and usually involves institutional investors. That's not what we are concerned with here. Our concern is more with smaller main street businesses that individuals or small partnerships can raise money to invest in. These are great opportunities for seller financing to provide the seller with a retirement income.

Seller Financing Commercial Property Investments

Commercial property investing often involves seller financing. However, sellers don't always see it this way. When they put their investment property up for sale, they envision an "all cash" sale. However, what do you think happens when your creative financing solution meets the seller's cash needs while also getting you into the investment property for zero down? I'd say that's a win-win situation that motivated sellers will go along with.

The key is knowing what the investment property seller is planning to do with the cash and how much they need for that purpose. Rarely do sellers need everything they will be paid or they have other options they can fall back on.
When your motivated seller accepts 35% cash (meeting their real cash needs) and carries the 65% balance, you are in the driver's seat of the commercial property investing deal as the new owner for zero down. Once you establish and agree to pay cash meeting the seller's needs, you have the option of finding private money to finance the cash portion and have the seller carry the balance of the financing....

Use Private Money to Finance Your Commercial Property Investing

Another critical piece of commercial property financing is knowing there are still billions of dollars in private money sitting on the sidelines today. Many individuals that were trounced by the last stock market plunge lost 40% or more. They aren't buying into the Wall Street's hoopla again any time soon.

These individuals have $100s of thousands and even millions sitting in bank CDs or money markets collecting a miserly 1% interest or less. These people are searching for secure investment opportunities paying 5% to 7% interest. Anything above the inflation rate looks good to them.

What if you offer them a senior lien position to finance the cash portion of your investment? A mortgage where the property is worth 35% more than the loan is for. It's easy to see highly secured loans are much more appealing than a 1% CD and with nearly zero risk to them.

That's called coming up with win-win, zero down, financing. A Private money loan paying 35% of the cash price so the seller only finances the 65% balance. This is among my basic tactics in my overall strategy to control as much real estate with the least amount of your own money invested.

If you want to further discuss this tactic or other wealth building tactics, please click here.

By Wendy Patton