Investing in commercial real estate is all about understanding the facts on the ground. If the details add up, you can reliably predict what a property turn is worth in advance. Of course, surprises can crop up, but with experience, you can account for those extra costs in your estimates. The key is understanding what you need to know before you make an offer and apply for financing.
1. Your Investment Goals Dictate Your Ideal Financing
There are dozens of specialized financial products designed to help you invest in real estate no matter how you do it. Each one is built around how your deal is structured, what your exit plan looks like, and what your conditions for exiting the investment look like.
- Construction loans for new development
- Renovation and rehabilitation loans
- Fix and flip loans
- Real estate bridge loans for cash-out financing
- Commercial mortgages
- Stated income commercial real estate loans
These are just the most common and widely-offered loans outside of the SBA’s small business loan program, which is mainly aimed at investors and businesses looking for facilities to operate a company from.
2. Your Investment Exit Scenario
If you are turning and reselling a property, you know you are going to exit when you have improved its value to the local market cap and remarketed it to a buyer who wants a turnkey home or business space. If you’re developing new buildings or acquiring long-term holdings for rental income, you might not have a clear exit plan in mind when you start looking at properties.
Some investors choose to renovate and then hold a building for rental income until another renovation is needed, selling it on to a new investor to renovate again. That window is typically seven to fifteen years. Others plan to hold it perpetually by refinancing the property to cover their renovations periodically. There are even income property investors who are gathering rental income while waiting for a certain speculative value that lets them sell it at a profit.
3. Your Path To a Return on Your Investment
How long will it take before you see money, and how big is the payday going to be? Are you going to be earning slowly for years to cover the cost of the acquisition, then relying on a stable income? What does your cost-to-sale ratio look like for each property you consider flipping? You need a clear path to your return that lets you accurately estimate how long it will take and what kind of financing you’ll need to get there. Once you understand that, it’s a lot easier to pick good deals and better financing for them.
