Investing in Real Estate – Should You Buy Residential Or Commercial Property?

We hear this often from real estate investors: “What’s the smarter move? Residential or commercial investment property?” It should come as no surprise that there isn’t a one-word answer to this question. You’ll arrive at your best choice — the one that maximizes your chances for success — by working through a decision process that includes some “global” issues, some local and some that are entirely personal.

Definitions

Let’s start with some terminology. For the purposes of our discussion, we’ll define as residential any property that derives all or nearly all of its income from dwelling units. Single-family homes, multi-families, apartment buildings, condos, co-ops are all residential. (FYI, the tax code classifies any property in which 80% or more of the gross income comes from dwelling units as residential, so many mixed-use properties can be classified as residential for tax purposes.)

For commercial property, we’ll use a typical layman’s definition: property that derives its income from non-residential sources, such as offices, retail space and industrial tenants.

Why do I say that this is the layman’s definition? Because appraisers and lenders would consider large (>4 unit) apartment buildings to be commercial investment property since they are bought and sold strictly for their ability to produce income and not as a potential personal residence for the owner/investor. However, it will suit our discussion better to treat all apartment buildings as residential properties.

Global Issues

What are the global issues that should affect your choice to buy residential or commercial property? The state of the U.S. economy certainly tops the list. If you believe we are in or are on the brink of a recession, then it makes sense to be cautious regarding commercial property. You will have to rely on businesses to occupy your commercial space, and if they’re struggling to survive or simply deferring their plans to expand, then rental rates may soften and demand for space decline. Replacing a lost tenant — especially one lost unexpectedly (in the middle of a lease, or the middle of the night) because of a weak economy — can take longer than it might in unstressed economic times. When the economy and employment are strong, of course, you are likely to see the opposite. Service businesses need more space, retailers open more stores, distributors need more warehouses.

Another issue is the cost and availability of financing. Interest rates are always important to investors, but there is one situation that may strike you as counter-intuitive. When home loans are readily available and mortgage rates drop, it’s not uncommon to see an increase in apartment vacancies, making apartment buildings less desirable as investments. The reason? Low mortgage rates and easy credit often mean that individuals can own a home at a monthly cost that is the same — or less, after taxes — than renting. So part of your potential tenant pool may be lost to home ownership.

Local Issues

In the real world, each of these global issues comes with a “however” attached. You need to stay on top of your local market because that market may contradict the national trend. For example, highly restrictive zoning regulations can mean that commercial space is always in short supply in a particular location, recession notwithstanding. And the cost of single-family homes in your community may be so high that there will always be a strong demand for rentals. Think globally but act locally (with apologies to environmentalists for borrowing their slogan).

Personal Issues

You could buy a property and then insulate yourself from it by turning over every aspect of its operation to a management company. But if you’ve never operated a property yourself, how would you know if the management firm is doing an acceptable job? Most investors begin as hands-on managers and your chances of success will be greater if you choose a type of property that you’re comfortable with.

So, at the personal level, will residential or commercial suit you better?

Unless you were raised in the woods by wolves, there is a very good chance that you’ve spent most of your life in a residential dwelling unit: a single-family house, a condo or an apartment. You have a first-hand understanding of the rights, obligations and appropriate behavior of a residential occupant. If you were a tenant, you probably also know something about the roles and responsibilities of both tenant and landlord. It is for this reason that first-time investors often lean toward buying a small residential building. You may not know the fine points of leasing and landlording, but you understand the basic ground rules. This is familiar and comfortable territory.

Of course, some novice investors come to real estate with a background in business and perhaps as a commercial tenant. If that description fits you, then becoming a commercial landlord may be an easy transition. You already have firsthand knowledge of how commercial lease deals come together, and what the parties typically expect of each other.

The Pros and the Cons

Like any of your investment choices, each type of property has its pros and cons. For example:

Residential Pros:

1. Residential units are generally easy to rent. Turnover in housing is high, so your pool of potential tenants tends to be large.
2. Leases are generally short, especially for apartments, so you can keep pace with the rental market. This means cash flow tends to be fairly strong with a multi-unit residential property.
3. Financing residential property is usually fairly straightforward. For smaller properties, the process is similar to financing a home.
4. The cost per unit tends to be lower for residential than commercial. The more units you have, the less likely it is that a vacancy will severely impact your cash flow.
5. You could live in one of the units of a multi-family property. Obviously it’s easier to keep an eye on the property if your eye is actually there.

Residential Cons:

1. Residential properties usually require a lot of hands-on management.
2. Residential properties usually require a lot of hands-on management. (That’s not a typo. I said it twice.)
3. With a single-family home, one lost tenant equals 100% lost rent.
4. Multi-family houses tend to be older and therefore may require more repairs and maintenance.
5. Residential tenants don’t keep office hours, so you can get a call or complaint at any time of day or night.
6. Larger multi-unit properties generally have a lot of traffic in common areas and will require greater upkeep.
7. Did I mention that residential properties usually require a lot of hands-on management?

Dealing with commercial tenants is quite different. Ideally, it’s business, not personal. You may require a personal guarantee on a lease, but you should expect to have more of a business-to-business relationship.

Commercial Pros:

1. Typically leases are longer, with built-in rent escalations. Five years, with options to renew is not universal but certainly quite common. Except perhaps for small offices, few businesses would be willing to go to the expense of becoming established in a particular location without a guarantee of more than just one year.

2. Many commercial leases pass through to the tenant a pro-rata share of certain expenses (or a pro-rata share of the increase in certain expenses, over a base). For example, the tenant may be obligated to pay its pro-rata share of property taxes and common-area maintenance. This helps stabilize the cash flow for the landlord and makes that cash flow more predictable.

3. Management is less hands-on than with residential. Renewals are less frequent. Many commercial leases are written to include the requirement that the tenant be responsible for interior repairs, HVAC maintenance, glass breakage, etc.

4. Depending on the type of space (i.e. more common with retail and high-end office), the tenant may fit-up the space to suit itself. The landlord may give a one-time fit-up allowance or a period of free rent, but the interior finish then becomes the tenant’s responsibility to maintain.

5. Because the property’s value is strictly a function of its income stream, you have the opportunity to create value by enhancing that income stream. In other words, you don’t need to rely on general market “appreciation” to increase the value of your property, but can take steps to do so yourself.

Commercial Cons:

1. Trying to purchase a commercial property on a shoestring may not be a realistic plan. Lenders are generally tougher underwriting commercial loans, especially if you have no experience operating commercial property. Down-payment requirements tend to be higher, as do interest rates. Loans are for shorter terms and often have a “balloon” requirement (i.e., must be refinanced before the nominal end of the term). The property will have to pass muster in terms of its projected cash flows and debt coverage ratio.

2. Leasing a commercial space can take much longer than leasing a residential unit. After a tenant is identified and basic terms agreed upon, it is usually necessary for attorneys for both sides to negotiate the language of the lease. The complexity and cost of this process can vary greatly, depending on whether you are dealing with a local or a national tenant.

3. Filling a vacancy can take much longer than with a residential unit. Commercial leases will typically require that a tenant exercise an option to renew well before the lease expires — perhaps six to as much as twelve months prior — so that the landlord can have ample time to look for a new tenant.

4. Financing commercial property can be more complex than with residential. You’ll need to demonstrate to the lender that the property will perform at a level that can can cover the debt service with room to spare.

5. If you don’t have experience being a commercial tenant, then becoming a commercial landlord may require that you get familiar with some concepts and skills that are particular to the commercial world. You’ll want to learn about “tenant mix” if you own retail space, about commercial insurance and about the billing and reconciliation of pass-through expenses.

While there is certainly no right answer to the question, “Residential or commercial?” there is probably a best answer for you. Do you want the hand-on involvement of residential? Do you have the resources for commercial? Do you want the potential for higher cash flow, and with it the possibility of greater risk? Do you prefer a more modest but more predictable return? Consider your objectives and preferences carefully, and evaluate your resources — time, money, skills — realistically. With a bit of luck, the answer should jump off the page.

Finding the Best Mortgage Rate for Your Needs

If you have found your dream home and are ready to make a purchase offer, congratulations! Shopping for a home is never easy. It is hard to find a home to suit your needs and wants, and you want to purchase a place that you absolutely love, not just a place that you have lukewarm feelings about. Whether you are purchasing your first home or your fifth home, the next step can be one of the hardest. It is time to find a mortgage! Dealing with finances is never fun, and picking a mortgage is one of the biggest financial decisions you will ever have to make. There are a variety of different mortgage rates available for every individual, and taking the time to find the right one for you will ensure you will be satisfied over time.

A mortgage is one of the biggest commitments you will have to make. Mortgage rates and terms vary between lenders so it is important to take the time to research what suits your needs best. Lenders, mortgage brokers and online tools can be great resources to help you with your mortgage. Every type of mortgage has both disadvantages and advantages, and experts can help you understand how each mortgage can affect your future. The wrong mortgage can have a huge negative impact on your financial future and can hinder your lifestyle. It can seem like a good idea to visit one lender to see their mortgage rates, but shopping around will give you the best mortgage rates and terms possible for your needs. Some people find that a well-qualified mortgage broker can be helpful in navigating through the process. At each stop, you will understand what you are looking for more and more, and this information will give you the ability to pick the best mortgage for your future!

One of the biggest mortgage decisions that needs to be made is deciding between a fixed-rate mortgage and an adjustable-rate mortgage. Both of these mortgages are different beasts and suit different financial needs. A fixed-rate mortgage has standard mortgage rates that do not change each month. From month to month, a fixed-rate mortgage payment stays the same. These mortgages allow for better budgeting, but tend to have slightly higher rates. The other type of available mortgage is an adjustable-rate mortgage. The benefit of an adjustable-rate mortgage is that the rates are typically lower than those of a fixed-mortgage, but since the rates change each month, it can be hard to budget and some monthly payments can be significantly higher than others. Both of these mortgages have advantages and disadvantages, and it is important to understand them in order to be sure to get the best mortgage for your lifestyle and needs.

Mortgage rates fluctuate between lenders so it is important to do research and speak with a number of different financial institutions before signing anything. An offer may be tempting to accept, but a much better offer may be available at the bank down the road. It is important to understand that there are many options available and choosing a mortgage will not be as easy as eenie, meenie, minie, mo. The good news is that with the available resources to help you find the best mortgage, you will find mortgage rates and terms to fit your needs and wants if you take the time to find them!

Discover the Top 15 Secrets of Successful Commercial Property Ownership!

1.) What’s Your Type?

There are many different types of commercial properties that you can purchase including:

o Office
o Retail Space
o Warehouse Facility
o Restaurant
o Commercial Condo
o Strip Mall

The first step is clearly defining what type of property you want to purchase and how you want to use it. The following information will help you maximize your investment dollars to get the best possible deal when purchasing your property.

2. Build Equity With Your Investment

Equity is Money

Building equity is the primary if not the ultimate reason to buy instead of rent a commercial property. Let’s face it. It’s money in the bank. In fact, it’s better than money in the bank because you can’t get the same kind of return on your money when it’s sitting in the bank as opposed to when you’re building equity. Moreover, if you choose the right financing for your commercial real estate purchase, you can not only build equity through ownership, but you can also leverage your capital saving in order to grow your business, hire additional employees, or even purchase an additional location when the time comes.

Owning beats renting because you can sell your investment once you outgrow the space or sell the business. Even if commercial property in your area has not appreciated (which is unlikely), you can recoup your investment by renting out the space once you move out and by selling when the time is right.

If you plan on growing into your building, buy something larger than your current needs, and rent out the extra space until you need it for expansion. This will provide you with steady income that you can use to help pay your mortgage or invest in your business.


3. Calculate Your Savings And Your Potential Profit

Lower Monthly Payments

Consider buying commercial real estate as a savings for your business. Real estate costs are the third largest business expense, behind payroll and taxes. Long loan amortizations mean that your monthly payments could wind up being less than what you would pay for rent, since landlords usually charge more than their monthly loan payment. In other words, owning your own commercial property may actually be more affordable, depending on current market conditions.

Ask your lender to provide you with an analysis of the current market in your area so that you can see which scenario is best for you (renting or buying). The lender should be able to explain your options in detail with examples of monthly rental costs vs. monthly loan payments and the benefits of each.

Analyze the Rent Value

Upon finding a property that peaks your interest, find out the status of the current tenants (if it is a multi-tenant property) in terms of how much rent they are paying. Check the current market to see if the rents are undervalued, meaning below what you can get in the current market. Your realtor or lender should be able to help you figure out how much you could charge for rent and determine how much of a profit you can make each month.

Tax Advantages

There are many tax advantages to becoming an owner of a commercial property. In most cases, you can deduct part of the value of the building at tax time, as well as improvements you’ve made as depreciation, which can save you more money on your taxes. Buying the property under your business or corporation’s name is also a better tax strategy than under your personal name.

4. Do Your Research

The more you can learn about property types and options, mortgages, financing, zoning and remodeling; the better position you’ll be in to make wise decisions concerning the acquisition of a commercial property.

However, you don’t have to know everything. That’s where putting together a powerful team of professionals proficient in their areas of expertise may be your most important step. Building a team of advisors – people you can trust to steer you in the right direction is critical to your success.

Understand Current Market Conditions

Keep your eyes open for news articles pertaining to the commercial real estate market. Is it “hot” right now? Is it a buyers’ or sellers’ market? What kinds of interest rates are available?

The Internet is a great place to start. Conducting a Google search for “commercial real estate market,” for instance, will give you results that include news and resources for national trends, analytics and market research.

In addition, many realtors, lenders and lawyers across the country offer free and timely articles on their websites that shed light on current commercial real estate trends nationwide. Again, make sure you listen to both sides of the story.

Tap Expert Resources

National market research companies can give you specific information about the area where you’re preparing to locate your business. You can also find information on demographics including the median age, household income, breakdown of ethnicities, and more from censuses available from the U.S. Census Bureau.

Also contact commercial lenders or realtors for additional resources. In looking for help, it’s usually better to talk to a lender or realtor with nationwide experience and up-to-date information than a small-time operation that might not have recent data for you. If the lender/realtor hasn’t gotten updated demographics since 1996, you’ve essentially wasted your time. Also, a lender or realtor that specializes in the type of property you’re looking for will be more likely to have the specific information you need, which will save you time in research.

Study the Current Vacancy Rate

Research what the vacancy rate has been over the past few years for the area you’re taking into consideration. If there seem to be high levels of vacancies, try to find why. Is it a bad neighborhood? Talk to store owners in the immediate area and find out how long they’ve been doing business there. Ask if they have any concerns that you as a potential property owner should know about the area.

Research Commercial Realtors

It’s important to research commercial realtors that specialize in the type of space you’re looking for. Grill the realtor you are considering selecting on the entire purchase process so you know what to expect. Ask how long the process usually takes so that there are no surprises. Check their references and their track record (more on finding a Commercial Realtor in #5).

Examine Experienced Commercial Lenders

Choosing a lender and financing program is just as important as choosing the property. Again, find out the entire process of financing, as well as your different options. Don’t assume that just because you’ve had a relationship with your bank for years that using their financing is the best choice.

Banks don’t always offer the lowest rate for commercial loans, and sometimes have a far longer turnaround than non-bank lenders. Some banks require that you transfer your accounts to them in order to qualify for a loan. Be aware of any stipulations when seeking a bank for a commercial loan.

5. Choose the Right Commercial Realtor

As mentioned before, you need qualified partners to help you with the process of buying commercial property. Start with a terrific commercial realtor.

Some commercial realtors work exclusively with individuals interested in investment properties. Others work with owners/users of commercial real estate, and among those some specialize in property management, which can be an added value to you.

Who Do You Know?

Referrals from trusted sources are usually the best way to find a good commercial realtor.

Ask Questions

Set up a meeting with more than one potential commercial realtor. Find out as much as you can about their professional background, education, and experience with your type of property. You can ask for a list of recent transactions to give you an idea of what they deal with on a regular basis, and how many properties they’ve actually sold in the last year or two. And most importantly, ask for client references (testimonials)! Real client feedback is the most effective measure for potential success.

The Right Match

Make sure you choose a realtor that understands your specific needs. If you are a small business, you don’t want to work with a realtor that normally handles multi-million dollar deals. Your project may become less of a priority when that particular realtor gets a bigger commission to worry about.

6. Consider Your Time Frame

If the reason you are looking for commercial property is because your lease is ending, think twice before jumping into a decision you might regret. Finding just the right space, securing financing and going through the process of obtaining a commercial property can take months. If you don’t have that kind of time, you may need to rent month-to-month for now.

Take Your Time

While you may be in a hurry to move into a space, take your time. Buying any kind of property is a major decision, and buying commercial property is even more important for the development and growth of your business. Selecting a property in the wrong area, or a space that doesn’t allow you to grow can hinder your company and even cause it to fail, so plan carefully.

If the realtor or lender gives you an estimate of three months from start to close, plan for longer – just in case. Keep in mind there are many people involved in the process of buying property, from the seller, realtor, lender, appraiser, surveyor, paperwork approvers, secretaries, and more and this process can often take slightly longer.

7. Location, Location, Location

One of the most important factors in considering commercial property is location. If a property is located on a busy corner that is difficult to get to, your business may not do well (in fact, that’s probably why the property is for sale). If you want to operate a dog kennel and the property you’re considering is in a residential area, not only will your business disturb the residents, the zoning laws may prevent you from operating there.

Foot Traffic

For a retail business, look for areas with high foot traffic that will give you the exposure and increased walk-ins you need to be successful.

If you are looking for an industrial or manufacturing facility, then you can stay out of the retail limelight and buy something in a warehouse district. These areas are usually cheaper than retail space.

Easy Access

Make sure your location has easy access from the road. Look to see if the site is at a difficult intersection. Is there construction going on that seems like it won’t be ending any time soon? On the other hand, what’s the potential once the construction is completed?

Check out the Competition

If you want to open a bistro in a neighborhood that has several bistros, you might want to try somewhere else with less competition. However, a healthy population of restaurants usually means a healthy population of customers.

Know Your Customer

Find out the demographics of the area you’re interested in. If you want to move your sports apparel shop to a new location, you’ll probably want an area with a high percentage of youth and active adults. An urban area with a lot of pedestrian traffic might be better for this kind of retail shop than a suburban area in a retirement community.

8. Free Parking

We’ve all spent time driving around and around looking for a parking spot. It can be very frustrating, especially when you’re running late. Whenever possible, you want a location that has ample parking for your visitors.
If you have a retail store, restaurant, or other high-traffic business, estimate how many customers or visitors you’re likely to have at any given time and consider rejecting any properties that have fewer available parking spaces than your estimates. Again, use your best judgment and consult your realtor.

Avoid Headaches

Also pay attention to how your parking is situated. If it’s located just off a major road, it may provide a headache for people trying to back out of the parking space, and may even cause accidents. When visiting the property, see how well you can maneuver the parking. If it’s a hassle for you, it will be doubly so for a potential customer or visitor.

9. Get in the Zone

Before you begin the negotiation process for a commercial property, make sure to investigate the zoning laws, as well as what types of businesses you are able operate there. There are zoning laws about the type of business that can be conducted in certain spaces.

For instance, some spaces do not permit food and beverage to be served, or may have restrictions on how late a business can operate. The typical zoning districts in most cities include: residential, commercial, industrial and mixed-use.

Don’t Assume

Zoning can be tricky, so do your due diligence on this topic. Don’t assume that just because the previous tenant of the space had a restaurant that the property you’re looking at is necessarily zoned for food and beverage. Many businesses slide under the radar for months or years while violating zoning laws. Making assumptions can cost you big time and big money when it comes to zoning.

Regulations

Zoning laws can regulate not only the type of business that can operate, but also parking, signs, water and air quality, waste management, noise, appearance of building and more. Find out any and all regulations regarding the property in advance.

Visit your local library or zoning office to get information on all the zoning laws, rules and regulations that apply to the property you’re considering for purchase. Talk to people at the zoning office if you have concerns or questions prior to making the investment. Ask your realtor to double-check your efforts to ensure you’ve covered all your bases.

10. Inspection

Normally, if you are considering buying a home, you have an inspector look at the structure, pipes, electrical system, etc. A commercial property requires even more of a stringent inspection, not only to meet your needs, but also the requirements of the local government.

Before purchasing commercial property, hire professionals to thoroughly examine the electrical system, including the sprinkler and security system, as well as the plumbing, phone, and Internet systems. Since you will have already done your homework on zoning and regulations, you will be aware of the building codes. With the results from your various inspections you can get an estimate of how much work, if any, will need to be invested in order to get the building “up to code.”

A Good Foundation

Hire an architect or engineer to examine the foundation and structure, especially if you have frequent natural disasters such as earthquakes or hurricanes in your area of the country.

Communication

If you are looking at an older building, there may be quite an investment up front to either meet city standards or meet your own standards. Don’t overlook the importance of a high-tech phone and Internet system, especially if you have a lot of employees. If there is not already a T1 or fiber optic network in place, build this cost into your purchase, as it will save you money and headaches in the long term over more traditional (and older) phone and Internet systems.

Make sure to hire an expert to tell you if the changes you need are possible and within your budget. With most commercial real estate loans, you can include these remodeling costs in your financing. Again, make sure to ask.

11. Map Out Your Plan

As a business owner, you understand the importance of carefully planning every move. Buying a property requires no less preparation. Before you begin looking for a building, sit down with your finances and figure out how much of a mortgage you can afford to take on.

Create a Budget

When calculating your budget for buying property, don’t leave out taxes, insurance premiums, and repair and maintenance, as well as costs involved in customizing the space to meet your needs. Failing to create a budget for these often overlooked expenses will quickly put you in the hole with your new property. If you need help creating this budget, ask your realtor or your commercial lender for advice.

Room to Grow

To determine the amount of mortgage you can afford, assess your income and expenses. Your mortgage and property expenses should leave you enough room to operate your business without cutting into your normal expenses.

Sometimes it is necessary to take a cut in profit in order to purchase the kind of space you need to grow. Think of it this way: buying a larger space will allow your company to stretch its wings, which will result in more profits down the road. It’s a risk you sometimes need to be willing to take if you want to grow. Remember, if you buy more space than your company needs immediately, you can acquire tenants who will provide rental income that can significantly offset your monthly mortgage obligation.

Planning Ahead

It’s almost always a good idea to buy slightly more room than you currently need. You can lease out the additional space until you need it. If this is your plan, map out how this will bring in income to help subsidize your mortgage. Remember, however, that you may have periods when some of the space is unoccupied, so don’t rely on the rent coming in to cover your mortgage every time. Make sure you can cover the mortgage on your own.

Have an Exit Strategy

So, how does it all end? Hopefully with big dollar signs. After all, that’s why you’re investing, isn’t it? To eventually cash in on your investment. Therefore, you need to have an exit strategy.

You might choose to hold onto your commercial property through retirement, as real estate is a great asset that can provide you with a steady passive income stream: a lucrative retirement strategy.


12. Before You Sign on the Dotted Line

Having a carefully drafted contract is key in your commercial real estate deal. You are required by law to have a written sales contract, and it is to your advantage to have one with each detail of the transaction documented.

Also, make sure to leave ample time for due diligence and closing, especially if any construction is involved!

Details

Despite the stories of real estate contracts being thicker than phone books, all you really need is a contract that lays out the important elements of your agreements. First, it needs to describe the property and the purchase price, as well as whether the price is due at closing or in installments.

Equipment, etc.

The contract should include any equipment, machinery, or personal property that is included in the purchase price. It should list any contingencies that must be met prior to completing the purchase. A common example of a contingency is whether you are able to obtain a loan to finance the purchase.

Don’t Forget…

The contract should cover how the property taxes and utility bills will be pro-rated between you and the seller, as well as what type of title insurance you must provide. The date for closing and delivery of possession should be in the document, as well as what legal recourse either the buyer or seller has in the event that the other party defaults on the agreement.

And Always…

Once the contract has been drafted, have a lawyer review it prior to signing it. A lawyer may be able to help you negotiate a better deal than what is originally presented.

Unfortunately, not all property sellers are honest, and some will try to hide their true purpose in technical legalese within a contract. Having a trusted lawyer and commercial realtor review your contract will keep you safe in your transaction.

13. Choose a Lender with Care

There are many types of lenders available to assist you with your commercial real estate financing. But keep in mind: not all are created equal. Do your homework in finding a lender that meets your specific needs.

It’s important to find a firm that can give you broad access to capital, understand your priorities, offer you the best deal on your loan and complete the process in a timely manner.

Types of Lenders

There are three basic categories of lenders: direct lenders, indirect lenders and hybrid lenders. Direct lenders lend their own funds. Some examples of direct lenders include commercial real estate lending institutions, banks, and private lenders. Indirect lenders place funds on behalf of others, and include mortgage brokers and mortgage bankers, as well as financial intermediaries. Hybrid lenders both lend their own funds and lend on behalf of others, and include certain investment banks, investment advisors and credit companies.

Banks usually generalize in services, and offer a wide array of products. While this may sound good, think about it for a moment. Would you rather have a lender that knows a little about many financing options, or a lot about three or four products designed specifically for you?

Lending institutions are more specific in nature, and are experts in the products they offer. Banks are more traditional in their financing products, while lending institutions are more entrepreneurial and creative.

Banks often require that you move all of your financial relationships under their umbrella, including deposits, LOCs, etc., while non-bank lenders only work with your real estate loan.

The U.S. Small Business Administration (SBA) is a great resource for small companies looking to expand their business or purchase real estate for commercial use. The SBA offers tools that can help you plan your next move, as well as loan programs for a variety of business purposes. The SBA itself does not offer loans, but works through banks and non-bank lenders to provide small businesses with loan programs that meet their needs.

Get Started Early

It is important to choose your lender early in the process so that you can maximize leverage and get a lower cost of funds. Your lender will ask for certain forms in order to determine your eligibility for financing, as well as to figure out what kind of deal you can negotiate.

You will need to provide your income and expense statement, balance sheet and personal financial statements from all prospective owners of the property. If you don’t have them written already, you will need to create profiles of the management team, including information on education and employment background, as well as experience relevant to your business. Other documents needed include a property appraisal, contract of sale, and plans for the use of the property. Providing these documents early can help streamline the process. Again, your realtor and lender will help you through the process.

14. Know Your Financing Options

While you are in the “shopping” phase of looking for a commercial property to purchase, you should begin to research your financing options. There are many kinds of commercial financing options available, so it is important that you find the one that best suits your needs. It’s also very important to know how much you’re qualified to borrow. This will help you and your real estate broker find the right type of property for you faster.

No matter what type of loan you wind up getting, negotiating the loan will be based on the same basic factors: anticipated use of the property, expected returns from the property or business conducted there, geography, type and size of real estate, perceived risk to lender and market conditions. There is no one rate applicable to all commercial financing. The rate you receive will be based on your specific situation.

If interest rates are low, securing a low fixed rate will mean you pay less interest over the entire mortgage. A variable rate, which is considered by some to be more risky, can give you a lower payment for a period (before it increases), which will let you use the money saved for other investments.

In weighing your financing choices, remember that some debt is good. Don’t assume you should take the loan with the highest down payment requirement so you can “pay off your debt faster”. Putting down more money means you have less to invest in your business.

Term Loans

Based on how much money you need to borrow, there are different financing options available. One option is a term loan. Term loans can be used for a variety of purposes, including financing permanent working capital, new equipment, refinancing, expansion, acquisitions and, of course, buildings.

There are loans specifically designed for commercial real estate or equipment. Banks typically lend up to 80% of the value of the real estate to be financed, and the loans must be repaid in 15 to 20 years. If you are able to come up with the remaining 20% on the cost of the property (and don’t have anywhere better to invest the money), this is an option to consider.

Up Up and Away

Beware of balloon payments. While paying a very low monthly amount at the start sounds great, you often end up spending additional money to refinance your commercial mortgage as lenders reset interest rates or reexamine you and your business over the life of the loan.

Credit Line

If you want a more flexible loan, you may have the option of a credit line that can provide you with cash on an as-needed basis, up to a cap amount. Credit lines almost always have a variable rate, and have interest-only payments for the first one to three years.

Equity Financing/Joint Ventures

Equity financing involves joint ventures with investors that have the capital you need. Usually, the investor will receive a percentage of your business’ profit in exchange for the capital you need to purchase the building or stock in the company if it is public.

Some investors will take a back seat to your executive decisions, while others will want a say in the operation of your company. Joint ventures are not for everyone, so keep in mind all of these factors when considering one.

The SBA 7(a) Loan Program

The SBA has a variety of financing products that are ideal for small businesses. The most commonly used SBA loan is the 7(a) Loan Program. The loan is provided through banks or non-bank lending institutions.

In order to be eligible for a 7(a) loan, your business must be for profit, and you cannot purchase real estate for investment purposes. There are many other guidelines to qualify for a 7(a) loan. The maximum amount a business can borrow from a 7(a) loan is $2 million. Furthermore, all SBA 7(a) loans have prime-based floating interest rates. This type of interest rate structure can leave you vulnerable to monthly/quarterly interest rate swings that can have a significant impact on your monthly mortgage payment.

Now you can see why it is so important to find a commercial lender who can help you digest all of this information and take the time to explain your options.

15. The Best Kept Financing Secret

One of the main reasons small businesses choose to rent instead of purchase their own commercial real estate property is the perception that they can’t afford the down payment. Many of them are not aware that SBA-guaranteed loans are available to qualifying applicants and can provide up to 90 percent loan to cost financing.

In fact, the 504 loan program was designed to assist small businesses in building or purchasing properties while spurring business growth in the local economy.

Only 10% Down

While in some parts of the country, use of the 504 loan program is widespread, there are other areas, such as those east of the Rocky Mountains, where this program isn’t getting the attention it deserves. If you are unable to put down much of the loan cost, the 504 is worth looking at: it only requires 10% – and there are no closing costs in addition to the 10% down! (Please note that there are certain basic criteria you will need to have to qualify for the 10% down program. A good lender work with you to do his or her best to help you qualify for this benefit.)

The other 90% of the financing comes from two places: up to 50% of the total cost (land, building, renovations, and soft costs) is paid for by a senior lien from a private-sector lender, and up to 40% comes from a junior lien from a Certified Development Company (this portion is backed by a 100 percent SBA-guaranteed debenture).

Smaller Payments

Since most banks and loan programs require a minimum of 20-30% of the property cost, and do not fold in soft costs and closing fees, 504 loans are a great way to get the best of everything: by paying only 10% down, you retain more capital and are able to make smaller payments over the life of your mortgage.

Because you have two separate loans with the 504, you end up getting a blended rate that is below market. The first loan is either fixed or variable, and is at or slightly higher than conventional financing rates. The second mortgage (the 40% loan) is considerably lower than market interest rates, and is fixed for the life of the loan. Having a lower interest rate lets your company retain more capital.

504 loans can close in 30 days or less, saving you time, and helping you get into your new property sooner. Another advantage is that there are usually fewer “hoops” to jump through to get approved, as long as you are dealing with a lender who specializes in this type of loan as opposed to one who might process one or two a year. The specialist knows this loan inside and out and can streamline the process, as well as make sure you are receiving all the benefits.

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