For Beginners: Ways to Finance Your First Commercial Real Estate Investment
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.
Commercial real estate is a great way to build your investment portfolio, but it can be difficult to get started. On top of that, you might be wary of the industry because of the volatility of real estate and the challenges of getting a loan.
If you’re serious about getting into commercial real estate, then you’ve probably already started looking for ways to get funding. Fortunately, there are many ways to get started.
In this article, we’ll cover how to get funding for your first commercial real estate investment.
Thoroughly Research the Property You Want to Buy
The first step in getting funding for your first commercial real estate investment is to thoroughly research the property you want to buy.
The best way to do this is through a comprehensive market analysis that helps you understand the financials of the property you’re interested in, as well as the market in which it’s located.
Once you understand the financials of the property you’re considering buying, you can decide which deal structure makes sense for your situation. A traditional commercial real estate loan would likely provide the most flexibility, but it also requires the most up-front capital.
Understanding Property Financials
Understanding the financials of a property will help you decide which deal structure makes sense for your situation. It’s not enough to know the current market value of a property; it’s important to also understand its forward-looking value.
This helps you determine if it makes sense to purchase the property as-is or if it would be more advantageous to buy and renovate the property.
For example, a property worth $2,500,000 might bring in $1,500,000 annually in rental income.
It might also require $500,000 worth of improvements to bring it up to code and get it ready for tenants.
It might not be worth the hassle and cost to renovate. If it’s worth it, then that’s a great deal of money that you wouldn’t have spent otherwise.
Know Your Numbers
After you’ve thoroughly researched the property, you’ll need to determine if you have the finances to buy it.
There are many factors that go into determining if a deal makes financial sense for you, but the two most important ones are cash flow and ROI.
Cash flow is the amount of money that comes in after expenses during the first year of ownership and ROI (return on investment) is just like it sounds: The amount of money you can anticipate making after all expenses have been paid back.
Create Your Business Plan & Set Reasonable Expectations
Depending on which funding source you choose, you will need to submit different paperwork to get their approval.
This often includes having a well-thought-out business plan. If you want to sell the property later, then your business plan will be helpful when trying to sell it.
Collect the Proper Third-Party Reports
There are a number of third-party reports that you’ll need to collect depending on your situation.
Among the things you’ll want to collect are details about your:
- Creditworthiness;
- Cash flow;
- Assets;
- Liabilities;
- Financing plan.
The type of lender you use will determine which reports you need to collect. Some will require more paperwork and supporting documentation than others.
Finding the Right Lender
Next, you’ll want to find the right lender. Finding the right lender is important for a couple of reasons. The first reason is that you’ll want to find a lender who is flexible enough to approve your loan.
Depending on the type of request, some lenders might be more flexible than others.
The second reason is that you’ll want to find the lender who will give you the best terms. Different lenders have different requirements for the purchase, acquisition, and renovation of your property.
Be thorough in your research before choosing a lender because not all lenders that advertise their loans will have the same requirements.
Convincing the Lender of Future Cash Flow Certainty
After you’ve found the right lender and made sure their loan terms are right, the final step is to make sure they are convinced of your future cash flow certainty.
Depending on which lender you’ve chosen, this could be as simple as showing them a business plan or as complex as getting them to sign a contract.
The key is to make sure they are convinced that you can deliver on the commitments you’ve made in the loan documents.
If the lender is convinced of your future cash flow certainty, then they’ll issue you the loan. If they are not convinced, then your loan request will likely be rejected.
Finally, you’ll need to sell them on how well your business concept will work. You’ll want to show them how competitive it is with their market and how many people have successfully done the same thing before.
Sell Yourself and Your Story to the Lender
You’ll want to make sure that your story fits with the lender’s loan program.
For example, if you want to use the lender’s owner-occupied loan to buy and renovate a property, then you’ll need to convince them that you are capable of buying and renovating the property.
Some lenders won’t require as much documentation as others. However, most lenders will require at least a business plan and they might require other documents depending on your financial situation.
You’ll ultimately want to sell them on what makes you unique. You’ll then want to tell them why you think they’d be a good partner for you going forward.
Alternative Funding Is Also an Option
Commercial real estate investing is great for your investment portfolio and to create a steady stream of income, but it can be difficult to get started.
Once you’ve gotten your feet wet, you can build on what you know and leverage your experience with other successful commercial real estate investments.
There are ways to get started even if you don’t have the cash upfront. Consider notes and other types of alternative funding arrangements.
One of the most profitable investments you can make is investing in real estate.
There are many opportunities out there for you to invest in property, but some of them require a lot more capital.
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