6 Factors to Consider Before Purchasing a Multifamily Property

Committed to purchasing a multifamily investment property? Keep in mind that doing your due diligence involves much more than just the property itself. Before you seal the deal, be sure to review the following 6 factors.

#1. The neighborhood and surroundings

Be sure you have a good understanding of the neighborhood in which the property is located. This includes not only the attractiveness of the area and potential demand, but also the surrounding properties, rates and policies, and their vacancy rates.

#2. The financials

Understanding the financial aspects of the subject property will help you project future potential income and operating expenses. You can learn more about property valuation here.

In addition, you’ll want to ask your real estate agent for a financial analysis of comparable properties so you can get a better idea of the potential performance of your investment.

#3. The lease audit

A lease audit is a basic review of all the existing leases for units within the property. This can help you understand the billings and lease terms for each unit, as well as stated income and expense figures. This can also be called the “rent roll.”

New to rent rolls? You can learn more, including how to read a rent roll, right here.

#4. The physical structure

As with any real estate purchase, it’s important to have an inspection conducted to understand the condition of the property, any issues that might need to be corrected, and any past issues. You may wish to consult with a contractor if you need further clarification on the findings of this inspection.

#5. The status of any pending litigation

Is there any pending litigation or lawsuits that you need to be aware of? Disputes of this nature can delay a transaction or prevent it from ever being completed.

Consult with a legal professional to learn about the options available to you should you find yourself dealing with complications like undisclosed property issues or contract/title concerns.

#6. The real estate tax bills

Have your real estate agent check the property tax data to make sure the taxes are up to date. You can also check the county appraiser websites to understand future tax responsibilities.

Finding Funding for Commercial Investment Properties

Whether you’re a first-time investor or you have a portfolio of multifamily properties, exploring your funding options is an important part of your due diligence. Learn more with our team today!

The Pros and Cons of Investing in Commercial Real Estate

As with any investment vehicle, there are pros and cons to investing in commercial real estate. Below, we’ll take a look at some of the most common positives and negatives associated with commercial real estate.

Pros of Commercial Real Estate Investing

Income Potential. Perhaps the best thing about investing in commercial real estate is the income potential. Investing in a commercial property that houses multiple tenants naturally provides you with the opportunity to generate more income through rents each month.

Flexible Financing. Unlike a residential mortgage, there are more options for funding with a commercial property. From traditional to non-bank lenders and everything in between (small business loans, peer-to-peer lending, etc.), there is a wealth of options available in the commercial space. 

Economies of Scale. Let’s say you purchase a multifamily property or a large office building. By owning a property with multiple units, you can often negotiate better deals with service providers, property managers, contractors, etc.

Semi-Passive Investment. Of course, there will be a time commitment to owning commercial real estate, but — because most businesses are 9 am-5 pm — it’s unlikely that you’ll be called for an emergency after hours. And, for those investing in multifamily properties, there’s always the option of hiring a property manager for those after-hours needs.

Cons of Commercial Real Estate Investing

Bigger Initial Investment. Generally speaking, a commercial property can require more money down than a traditional residential mortgage. Similarly, the unexpected expenses (ex: repairs, maintenance, management, etc.) can be larger sums than what would be expected in some other types of investments.

Reliance on Others. With a commercial property — unless you intend to manage it yourself — you’ll likely need to rely on others to help you maximize your investment. Property managers, specifically, play a great role in the success or failure of your investment, as they are the “eyes and ears” of the property and the first stop for tenants.

Greater Risk. Commercial properties often hold a larger risk thanks to the number of visitors they could see daily. There is a risk that a visitor could fall or get hurt or that vandals could damage your property.

Making a Commercial Real Estate Investment

If you’re interested in learning more about how to invest in commercial real estate or you’d like to explore your funding options, our team of experienced loan officers would be more than happy to speak with you. Connect today to get started!

 

The Commercial Loan Application Process: What to Expect

If you’ve never been through the commercial loan application process before, it can be surprising to some just how different it is from standard residential mortgage applications or other loan processes you may have completed in the past.

Here are four things you should expect when applying for a commercial loan:

1.    A Unique Process

The commercial real estate loan application process is quite different than what you may have previously experienced when buying a home. For a residential mortgage, the lender would have looked at your personal credit and income to determine your ability to pay your mortgage payments.

On the other hand, a commercial loan underwriter is looking not only at your personal and business finances, but they’re also analyzing the property itself to ensure its historic and future income can support the debt of the loan, as well as any other property-related expenses.

If you’re receiving funding from a traditional bank lender, the commercial loan process can take several months to complete. This can be an unexpected part of the process for first-time commercial loan applicants.

2.   The Amount of Documentation Required

With the added scrutiny of the commercial loan application process, you should be prepared to provide a wealth of documentation pertaining to your personal and business history and goals. It’s not uncommon to be asked for any (or all) of the following documents:

●     Business and/or personal bank statements

●     Your business tax ID

●     Business and/or personal tax returns

●     Profit and loss statement

●     Balance sheet

●     Debt schedule

●     Business legal documents (ex: licenses and permits, proof of insurance, articles of incorporation, etc.)

●     Your business plan

It should be noted, however, that some non-bank lenders offer reduced documentation loans that can streamline the amount of paperwork and history needed to get a loan.

3.   The Number of Available Loan Options

With commercial real estate loans, you have a wealth of different lending options available to you. There is always the traditional bank route, but new options like non-bank lenders, hard-money lenders, and even peer-to-peer lending are making it easier than ever before to find funding that meets your unique goals and situation.

4.   The Actual Funding Process 

You may also need to set your expectations for how long the actual funding process can take. It’s not uncommon for the loan process to take several months with a traditional bank. On the other hand, with all the right documentation in place, a non-bank lender can often close in as little as 35-45 days.

If you’re considering a commercial loan for your investment property, be sure to connect with our team today to learn more about your funding options.

2 Steps to Take Before Investing in Commercial Real Estate

Becoming a commercial real estate investor will take time and considerable effort. That said, the journey really does start by taking that first step.

But what is the first step? How can you start your journey with the understanding that you’re putting yourself in the best position to make a solid return on your investment?

Here are a few “first steps” you can take before you purchase a commercial property, such as a multifamily building, retail strip center, or office space.

1.    Do your homework

There are a few key differences between commercial and residential investing – those who plan to purchase their first commercial property must understand these differences if they hope to see a strong return on their investment.

Perhaps most important is the issue of property valuation. While the value of a residential home is mostly derived from studying comparable properties in the area, a commercial property’s value is determined by the amount of income it generates. As a result, the tenants within a commercial property – their experience levels and business models – should be studied before making any type of purchase.

Since you’ll likely obtain a loan to help you purchase a property, it’s also important to understand how financing works in the commercial real estate world.

In their efforts to evaluate a property’s ability to generate income, lenders use calculations that may be new to you.

One prevalent metric within the commercial mortgage transaction process is the Debt Service Coverage Ratio (DSCR). This metric is calculated using the derived property Net Operating Income – the amount of net income after expenses – divided by the debt service (the principal and interest payments).

The objective for the lender is to determine how much they feel comfortable lending based on the amount of income the property generates.

Of course, lenders also review the borrowers themselves. Traditional lenders will want to see documentation such as tax returns, though this can present difficulty for certain investors.

Fortunately, reduced documentation loans do exist in today’s market. These carry a slightly higher interest rate, but they give investors more flexibility – a tradeoff many are more than willing to make.

Finally, you should also take time to become familiar with the various aspects of running a commercial property. The amount of maintenance and management involved can be substantial, so much so that many owners hire full-time property managers to run day-to-day operations.

If you’re not prepared to devote much time and effort to your commercial property, perhaps now is not the time to invest.

2.    Start with the end in mind

Investors who only plan for the initial purchase of their commercial real estate property are setting themselves up for failure. That’s because one of the main keys of successful property ownership is a solid exit strategy.

What’s your ultimate objective? Are you looking to execute a fix-and-flip? Do you want to pass the property down to future generations?

Length of ownership is an important consideration because it impacts the type of financing you’ll want to secure as you purchase the property. Those with a long-term vision for their investment may want to minimize payments with a long-term financing solution – like a 30-year fixed rate loan.

On the other hand, “fix-and-flippers” may prefer a short-term loan that allows them to quickly transition to their next investment opportunity.

Thinking ahead will also help as you review potential purchases. For example, it could be a wise strategy to own a multifamily property in a growing sector. As the population increases, so does the demand for a unit in your building.

However, those looking to purchase certain property types, such as retail strip centers, should carefully review market trends to avoid owning a retail property in an economically distressed area. Investing in commercial real estate can be a rewarding experience, but those who wish to purchase a property must take several important steps to increase their chances of seeing a positive return.

The steps listed above are just the beginning. To learn more about the process – especially when it comes to the financing of commercial properties – reach out to one of our mortgage experts today.

How to Maximize Return for Your Commercial Real Estate Investment

Investing in commercial real estate is a big decision. And whether you’re new to investing or have a large portfolio of properties, focusing on strategies to maximize your return on investment is an important part of the investing process.

Here are just a few ways that you can maximize your commercial real estate investment: 

1. Analyze comparables and neighborhood data before purchasing

Your due diligence as a commercial real estate investor is vital to your success and, therefore, your return on investment. Prior to any purchase, an investor must analyze comparable properties — including any future developments — to help understand the current market value of the property. What’s more, investors should also examine the property’s neighborhood and its demand.

By doing this research ahead of time, investors can have the confidence they need to feel they are not overpaying for a particular property and that there is demand in the neighborhood for that type of property.

2. Understand the property’s key performance metrics

In addition to researching comparables and neighborhood demand, it’s important for investors to explore a potential investment’s key performance metrics. These indicators can help establish estimates on future performance and, therefore, your potential return on investment. Some examples are: 

●     Net Operating Income: NOI is a calculation that looks at all the costs and revenue for a specific property. Calculated before taxes, this number provides investors with an idea of how much they will net from the property after all the operating expenses are accounted for.

●     CAP Rate: This calculation looks at the value of income-producing properties. The capitalization rate is essentially the ratio of NOI to the property’s value. It helps investors get an estimation of future proceeds or cash flow.

3. Don’t buy bigger than demand

It can be easy for real estate investors to be eager and over-purchase in a particular market. However, doing so can potentially impact the marketability of a property when it’s time to sell. If you purchase a 30,000-square-foot building, for example, the pool of potential buyers could be smaller when it’s time to sell — simply because of demand.

This goes back to doing your market research and understanding the local real estate climate prior to making your purchase. It also means thinking about your potential exit strategies to ensure the returns you’re expecting are even attainable.

4. Consider the improvement opportunities

No matter the type of commercial real estate you’re investing in, it’s always wise to consider the improvement opportunities that could help boost the property’s value. In today’s market, LEED and green building improvements are popular with tenants, as are any renovations that improve the technology within a building.

Of course, the types of improvements that offer the biggest potential for returns will vary based on property type, market demand, comparable properties, and more.

Make Sure Your Financing Supports Your Objectives

Lastly, savvy investors know that finding the right commercial real estate funding can make or break your ability to see a nice return on investment.

If you’re curious about the benefits of investing in commercial real estate or need help finding the right funding options, our team at Investment Property Loans is happy to help. Connect with our team today to learn more!

How to Improve Relationships with Tenants in Multifamily Properties

Creating and maintaining positive relationships with multifamily property tenants go a long way toward increasing lessee retention rates.

Sure, you understand the value of creating a safe and happy environment for those who choose to live in your building. But where do you start?

Here are 5 quick ways to improve your tenant relationships and limit costly vacancies.

1.   Listen to your renters

Want to provide a better experience for tenants? You can start by listening to what they have to say.

As a property owner, it can be easy to miss the forest for the trees. In other words, you may be so focused on filling a few vacant units that you disregard a major issue that current tenants face every day, such as a faulty elevator or messy lobby.

Your tenants can alert you to these issues. You just need to give them a platform so their voices are heard.

This could be an online message board, a suggestion box, or even a cell phone group chat if the number of tenants is small enough.

What matters most is that your tenants feel comfortable voicing their concerns.

2.   Perform regular maintenance

The faster you can respond to a maintenance issue, the better. Fast service helps reassure tenants that they are being taken care of, and helps them avoid having to deal with an uncomfortable situation any longer than necessary.

Responding to issues is just one aspect of maintenance, however. Make indoor/outdoor maintenance a regular activity to ensure that your tenants spend their time in a clean, inviting building.

These tasks could include lawn care, window cleaning, and general maintenance in areas like bathrooms and lobbies.

3.   Spend on improvements when necessary

A penny saved may be a penny earned, but saving too many pennies at the expense of your tenants’ well-being may cost you business.

The key is to put aside a small portion of your revenue for property improvements each year.

Then you can schedule projects and tackle them one at a time.  Maybe this year you can replace the flooring in an area of the property.  Next year you could update the bathrooms for your tenants.

Be sure to communicate the schedule to your tenants, they’ll feel more confident knowing that you care and that you have a plan for addressing the things they need, even if you can’t accomplish all tasks at once.

4.   Respect your tenants’ rights

You might own the property, but you absolutely need to respect the rights of those who live there.

A major issue involves tenant privacy. Perhaps you already understand that you should not arrive unannounced to make repairs within a renter’s unit. But states have laws regarding the amount of notice you must give tenants in these cases. Set time aside to research these and other issues.

For issues that don’t involve state or federal laws, common sense and good manners should prevail. Tenants will appreciate the standards you set regarding issues like visiting hours, guest parking, and mail delivery.

5.   Exercise Compassion

Your multifamily property may be an investment opportunity for you. But it’s a home for others.

Issues that may seem inconsequential for you could have a large impact on tenants’ quality of life. Putting yourself in their shoes can really help you make decisions that benefit all parties.

The good news is that if you’ve created the feedback loop mentioned in the first point here, you should have little trouble seeing issues from your tenants’ perspective.

It may not be immediately clear how positive relationships affect your bottom line. But happy tenants can reasonably lead to fewer vacancies and therefore a better return on your investment.

To learn more about the benefits of investing in commercial real estate, contact us today. Our team at Investment Property Loans is eager to help you get started.

What Do Commercial Mortgage Appraisers Look at When Reviewing a Property?

Borrowers approaching their first commercial mortgage transaction may wonder how similar the process is to the one they may have experienced when obtaining their residential mortgage.

The truth is that commercial and residential lending are quite different in a few key ways.

A perfect example of this reality involves the property appraisal process.

Residential real estate appraisals are fairly straightforward in nature since one house in a neighborhood can easily be compared to those in the immediate vicinity.

On the other hand, the commercial properties located on one city block may vary greatly. Just think of the many differences between warehouse, mixed-use, office, and apartment properties.

The complexity of the commercial process is the main reason why appraisals can be about 100 pages long and take several weeks to complete. As a result, they can cost upwards of $3,000.

Want to learn more? Keep reading to get a quick rundown of what appraisers look for when evaluating a commercial property.

Why Get Appraised?

The purpose of a commercial property appraisal is to establish the market value of a commercial property. The collection of information gathered about the property helps create a baseline metric for lenders seeking to make an approval decision on a borrower’s funding request.

The mortgage appraisal will be needed throughout the property’s lifespan. It is consulted for tax assessments and appeals, lease negotiations, when finding an appropriate selling price, for mortgage lending purposes, commercial real estate counseling, and more. The commercial appraisal stands as the property's fundamental hub of data and is utilized time and time again.

Who Orders the Appraisal?

While the process differs depending on the institution, in many cases the lender will purchase the property appraisal.

This can make life easier for business owners and investors who are new to commercial lending. Lenders develop strong appraiser relationships over time and are able to expedite the process. In many cases, they can work with the appraiser to keep costs down as well.

The Initial Inspection

The appraisal process begins with a professional inspection. The scope of this process varies depending on size, type, and function, but it generally takes a couple of hours. During this time, the property will be evaluated on many different grounds - function, size, capacity, condition, electricity, sanitation, and so on.

The initial inspection establishes the framework for the entire mortgage appraisal. Appraisers will consider what the intended use is and what needs to be adjusted or repaired.

Gathering Data

Once the inspection is completed, the real work begins. The appraiser will then spend either days or weeks collecting data from the property’s past. Research is conducted regarding the property’s public records, zoning laws, previous ownership and use, market area data, scarcity, sales, utility, rentals, purchasing power, and more.

There are a few standard types of approaches appraisers take when performing a commercial real estate appraisal: cost, income capitalization, and sales comparison.

• Cost Approach: This approach gives lenders an estimation of a property’s value by determining how much one would have to pay to replace it.

• Income Capitalization Approach: This approach provides a market value based on the income that a property can generate.

• Sales Comparison Approach: This approach is used by appraisers to determine the value of a property based on recent transactions in the surrounding area.

An appraiser may incorporate each approach as they work to determine a commercial property’s market value.

Obtaining the Report

Once the appraisal report is completed, it is confidentially disclosed to you. The commercial appraisal can then be shared with a lender or whoever else you authorize to receive the document.

Have Additional Questions?

The commercial mortgage property appraisal is just one aspect of the transaction. If you’re new to commercial lending – or you’d simply like to learn more – don’t hesitate to contact us today.

By sharing some basic information about your property and financing request, our experts can help you feel more confident about getting a loan that really works for you.