Is Commercial Real Estate Financing Post-Pandemic a Reality?
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
The post-pandemic world is opening up new opportunities for investors, and the commercial real estate space is exciting. Indeed, there was a point where people absolutely wouldn’t get out of their homes to do their shopping, causing a spike in e-commerce shopping. While it’s true that e-commerce isn’t going away, the truth is that people are ready to do more in-person transactions.
We are social creatures, and shopping is part of the greater social contract. So commercial storefronts are growing in popularity, as well as new creative spaces for living in. If you’re looking for your next big opportunity, commercial real estate (CRE) is the way to go.
But are you going to have enough cash to make a move? While the pandemic created plenty of closures, things are indeed making a comeback. So while there are some discounts, prices are still not rock bottom.
You can turn to financing to make your next acquisition. This guide will walk you through the finer points of what you need to know to not take on too much risk by leveraging other people’s money to purchase CRE.
Limitations of Investing Only with Cash
Trying to buy everything with cash does have its advantages, but it comes with plenty of limitations. Most investors are starting with less money in the proverbial war chest, which means they have to consider the best way to move forward.
Cash limits you because, while you can move on a property faster than someone with a mortgage, the truth is that you have all of your money tied up in one property. This is troublesome when the market experiences a downturn because it means that you can’t pull your money out and explore other opportunities. Holding costs play a significant role in real estate investing.
Financing is leverage, and leverage multiplies your efforts.
Understanding the Risks of Commercial Real Estate Financing
Financing comes with its risks, of course: you will have to pay on the loan every month, even if you don’t have a tenant in the property. If you buy space to convert into a storefront, you will still have to honor your obligations even if you don’t have customers. Calculating these risks is essential before diving into financing.
Yet all investments have their fair share of risk, and it’s a matter of thinking about the level of risk you can handle.
Commercial Real Estate Financing Fundamentals
If you’re looking at new financing options, it’s time to go back to the fundamentals. We’ve included a few points, along with other considerations, to keep in mind as you begin looking for the best deal.
Terms
When it comes to commercial real estate financing, it’s all about the terms offered. The financing terms refer back to how long the mortgage is for in years. The longer the term, the lower the payments, but the amount of interest paid is higher.
Interest Rate
The interest rate will vary from deal to deal. The important point is to read carefully and know the interest rate, not just the monthly payments. The interest rate will vary on a variety of factors, so it’s important to shop around for the best interest rates.
Payment Due Dates
Knowing when the payments on your commercial financing are due is very important. Late fees are easy to accrue, but they’re also easy to avoid.
Other Considerations
One of the top points that make commercial real estate financing so different is that it’s all about the loan to value. Calculating the loan to value is easy: it’s just dividing the loan amount by the property’s value. Commercial financing is based on a LTV of 75% to 80%, which means that you are going to still have to have some skin in the game, so to speak.
What do your cash reserves look like? Getting financing is only one piece of the puzzle; you’ll still need to have significant cash reserves in play to handle marketing the property and other fees that come along with buying commercial properties.
Keep in mind that you will also need to check on whether or not you need specific permits in order to make major updates or even turn it into an active business space. These considerations may seem minor, but they can make or break a real estate deal quickly.
When in doubt, having a real estate attorney well versed in commercial buildings is a wise decision. They can address concerns specific to the deal in question.
Tips for Investors Looking Over Financing Agreements
If you’re going to go with financing your next commercial real estate deal, there are a few points that you should keep in mind. Financing is a serious move, and it does require some planning. Here’s what you need to know:
- Are you borrowing just to get the property, or will you need to build a package that includes renovations?
- Make sure that you can comfortably handle the payments on the loan, even if you don’t get a tenant into the building for a few months. It can take time to market a property, which means that you still have to take on the costs in the meantime.
- Budget for unexpected repairs that weren’t visible on the inspection report.
- Shop around for a good interest rate; don’t just take the first offer.
These points may all sound like common sense, but you might be surprised at how quickly things can change when you’re eager to get a deal. Many investors have found themselves in hot water by not conducting enough research on both the property as well as the financing.
Be Patient: Never Rush into Financing a Property
Commercial real estate financing is a great way to grow your investment portfolio, but it isn’t without its advantages and disadvantages. If you are picking up a property with financing, make sure that you read over the terms carefully. This is often where investors rush because they’re trying to get a particular property. However, the better approach is to realize that there will always be a deal, even if it takes a little longer than usual to appear.
We believe that financing, like so much in real estate, is just a tool. It isn’t positive or negative, just neutral. Using your tools well will make you a far better investor than being afraid of something just because of "horror stories" online. Invest well, do your research, and make sure that the financing leads you to build something better instead of getting stuck with more debt that isn’t working for you.
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