Common Commercial Property Investment Mistakes and Methods to Avoid Them

Mistakes Made by Commercial Investors

Some investors decided to refinance their $10 million commercial property for $8 million and get $1.5 million out tax-free! What seemed like a great deal at the time has come back to ruin the typical commercial property investment. The problem was that these loans needed to be refinanced after five years. Owners who pulled money out of their investments like this began down a path that has led to the troubles we are seeing now.

Fast forward from then to now and you’ll see that the entire economic climate has changed. Most sources of financing for commercial real estate have dried up. Owners with a property that needs to be refinanced are finding that unless the LTV ratio is 65% or less and the property is performing perfectly, it’s almost impossible to get refinancing for their commercial property investment.

You can’t tap into those hedge funds and private equity firms because many of them have gone out of business. So you are left with two options:

1) Create a workout with the existing lender where they refrain from foreclosing against your property in exchange for a slight increase in the interest rate, or other benefit that you can give the lender. In some cases the benefit to the lender is that they don’t need to take your property back. The truth is that the lender really doesn’t want to take back your property if they can avoid it.

2) Bring other investors into your deal by offering them a decent rate of return on their investment along with giving them a chunk of your equity. Make sure to contact a commercial property investment attorney who can help make sure that you meet all of the SEC guidelines if this is the path that you choose to go down.

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What Makes a Safe Commercial Property Investment

The problem with many owners of commercial properties today is that they got into a deal with a bigger loan than they should have. Now, these commercial property owners can’t ride out the recession because the loans are coming due and they’re short, or worse, upside-down.

Investment rule #1

-Leave the equity in your property.

· Successful property owners don’t pull out their equity at the top of an up cycle; they leave the equity in their commercial property investment so they can ride out the downturns. The “commercial meltdown” doesn’t apply to property owners who left their equity untouched. While it’s true that the commercial property values have come down from a high peak. The typical commercial real estate investment is far more valuable today than it was 10 or 15 years ago.

Investment rule #2

-Stick with conventional lenders.

· By taking a short term hard money loan commercial owners placed themselves at the mercy of the fickle market. A conventional lender would not have financed more than 65 percent of the property value, allowing the owner with a cushion against fluctuating property values.

When structured correctly, your real estate investment may not provide you with an overabundance of excitement, but during times like these, a stable, performing real estate investment is just fine.

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