Commercial real estate can come in many different varieties, such as apartments, department stores, retail chains, big box stores, office buildings and warehouses, yet investors seek the same basic qualities in whatever commercial property they invest in. By understanding three simple rules of investing in commercial properties, you’ll have a better chance to find capital for your property.
First, the property in question has to be valuable. Your lender will likely take into account the property’s age and condition as well as how it fares compared to like properties to assess whether the property is worth enough to take a risk on. If the lender deems the commercial real estate a solid investment, the lender will accept it as collateral. However, your lender may also require other assets to back the loan, including your invoices, rents and other contracts. Some lenders even require the borrower’s personal assets to be assigned as collateral, such as vehicles or the borrower’s own home.
Second, your property needs to generate income. Investing in commercial real estate that does not produce a steady flow of receipts or has an erratic cash flow won’t be seen as a wise move by financiers. To prove your case to a prospective lender, you’ll need to produce financial documents that show the property’s income history. For example, if it’s an apartment building, show how much the property has made in rental fees. A strong commercial property will be able to generate income that can cover both the annual principal and the loan’s interest payments.
Finally, understand that commercial property lenders can come in many different forms. You shouldn’t approach a lender cold. You may find their terms don’t fit your enterprise well, or approval is taking too long, or perhaps they lack perks than another lender may offer. If you want to be a savvy borrower, research all your options. Some lenders may offer government backed loans. SBA loans can provide capital that can pay for needed business equipment. You can even get financing from insurance companies that have their own lending division. For borrowers who have properties challenged by conditions that don’t allow for usual financing, hard money or private money lenders are available.
Following these principles is no guarantee that you’ll be approved for a loan right away. However, meeting the common expectations of commercial real estate investors shows you’re an informed entrepreneur and will greatly boost your chances in the long run. And by choosing the right investor, you’ll eliminate potential rejections and save time in the process.