Loans on commercial investment property

More and more investors are turning toward commercial real estate. Single family residences seem to dominate the private real estate investment avenue. However, many investors have no desire to be property managers full-time and may not have the ability to fix the toilet in the middle of the night when they get the call. Still they see the wisdom of diversifying their portfolio to include at least some real estate.

Commercial landlords have an easier road in general. An office or retail space will have situations arise inevitably. The difference a majority of the time is that the tenant generally takes care of minor problems on the interior of the building without any nuisance to the property owner. This is understood in the lease agreement from the very beginning and thus eliminates the likely emotional outburst involved with residential tenants.

Don't get me wrong, my hat is off to residential real estate investors. In fact, a couple of my very favorite clients do extremely well in residential investments. They have the patience and the skills to be successful. But contrary to the late night TV infomercials, not everyone should be a landlord. It can be dangerous for the tenants in particular that so many want-to-be landlords think that there is not much to it.

Loans for residential investment have become attractive

Many established investors can secure loan terms on residential investment properties for rates comparable to advertised mortgages on principle residences.

Commercial investment loans are a little more difficult to come by. When owners occupy at least part of the space themselves it does become easier. For instance, the owner of a strip mall may occupy the primary end cap with his own office or business. This can increase the occupancy rate and thus decrease the risk to a decree.

The type of tenant, numbers of tenants and location of the property all affect the risk assessment for your loan. An experienced, commercial buyer's representative can shed light on all these factors while you are in the looking and buying process.

The financial integrity of the borrower also has a major impact on the terms offered. There is no cookie cutter for these loans; however, it is rare to see a long term fixed rate or a high loan to value ratio.

Typically an investor with excellent credit and low to moderate risk tenants will be able to borrow about 80 percent of the purchase price or the appraised value, which ever is less. One to 2 1/2 points above the prime lending rate is a good rule of thumb for rates with a one- to three-year adjustable rate term.

Cross-collateralizing is common especially if any one or more of the above mentioned risk factors is considered high. A lender will often want to tie up as much collateral as possible. When personal homes, vehicles and other property are tied to a property it does decrease the risks for the lender considerably.

Be careful though about jumping to cross-collateralize. When time comes to sell or refinance one or more of the properties it can be complicated. The lender may not be able or willing to give a partial deed of release on the piece of property you need to pull out of the cross-collateralization and you could be forced to miss other good opportunities.

If you have a strong financial statement and the property you are wanting to purchase has a good risk assessment, you should be able to find a lender who will not insist on attaching to your personal assets for your commercial investment loan. If you need the equity from your personal residence for a down payment, take out the equity loan separate from your commercial loan.

Commercial real estate investment can be one of the most rewarding and least stressful of all investments after the loan is acquired. But it does require more specific education on the part of the investor and the investor's Realtor. Take advantage of the mistakes and successes of others by consulting with some who have traveled the path before.

Cynthia deJournett Austin is the CFO of Team Austins Inc. in Jackson and a licensed Realtor specializing in commercial and investment property with RE/MAX Achievers in Cape Girardeau. (573-979-SOLD or www.teamaustins.com )