Commercial Property Financing Considerations:
Real estate financing for your investment property can be simple or complex. Investment property mortgages, or commercial mortgages as they are sometimes known, are available for real estate investors, as is private money, but the decision to use investment property mortgages to finance your real estate investment depends on very specific aspects of the particular investment property, the current financial market, and the financial circumstances of the investor. Some things to consider are mortgage interest rates, tax issues (income vs capital gains, as well as Income Tax Deductions), payment issues and rent collection, maintenance costs on the property, debt service, and other financial matters.
Registered users of this site can access comprehensive cash flow management tools to determine cash flow and other aspects of managing your investment property, to see what numbers work for you.
Commercial mortgage financing costs more in terms of interest than residential loans of the same value. This is because lenders consider the commercial mortgage somewhat more risky. After all, generally investors don't live in their investment properties, and view maintenance as an unwanted expense. Of course a real investor would want to maintain the value of the property and therefore would want to keep the property well maintained. In any event, in commercial mortgages, interest rates are higher, and the lender is generally more demanding in their criteria for approving the loan. We are talking about investment property loans from standard lending institutions. Private funding is also available, and while it does have advantages, it is is usually even more expensive that commercial mortgage money.
When
Should You Sell Investment Property?
If
you believe what it says, late night TV is full of great ways to invest
in real estate. Most investors -- they seem to suggest -- are looking
at big paybacks with no money down. That's unlikely, like going to the
store to buy a watermelon and offering to pay for it with a paper clip.
It
takes forethought and preparation to be successful in real estate investing. You
need to realize that buying real estate is investing and with investing
there is risk: If you don't know what you're doing, you can make a costly
mistake.
Choosing
Your Investment Property
Beginners to real estate investing should start with small projects, just like Walter from Hawaii.
He's been involved in investing in real estate for more than 12 years and invested
in various two- to seven-unit properties. Properties -- both commercial
and residential -- in good locations have made money for him. The properties
he purchased in marginal locations, with high leverage down payments and
extensive tenant turnover have not worked out for him.
Walter
started with a duplex, which he later refinanced to buy a four-plex. He
painted and put a new roof on the four-plex, then sold it for a seven-plex.
He also bought a four-plex with one-bedroom units. He renovated the units
and installed new siding, but in the end, he was lucky to receive a return
on his investment.
Living
in Oregon, he was far away from his real estate investments in Hawaii and could not
pay enough attention to the renovations. One moral of the story is that
fixer-upper investments -- like real estate investments generally -- work
best if you live nearby and, if possible, do the work yourself.
Other
factors hampered the success of his investment, such as a market more suited
to two-bedroom units rather than one-bedroom units. As to Walter, he learned
more with each investment and he also learned to be conservative.
Whether
you're looking to purchase a house, duplex, 50-unit apartment project,
or commercial property, you need to carefully review the property's economics.
Are the rents used in your projections realistic? Are the expenses correct?
Can you live with the cost of investment mortgage financing? What happens
when you have a vacancy? Is there enough cash flow to cover it?
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