December 15, 2016
Do you have a clear purpose for selecting a commercial investment property? Do you have a clear plan? Have you given much thought to it?
Why? For some of you it is obvious. For some it may not be.
Let’s start out with a real life story of what can happen when you do not have a clear purpose and plan in selecting a commercial investment property. One of our clients--let's call him, Bill (not his real name)--found a multifamily property and applied with us for an apartment loan. It was love at first sight for him when he found this gorgeous apartment property. It was new and stunning!
The problem was that it was overpriced and had low cash flow. He would not be making much of a profit. But he was blinded by the beauty of the apartment complex and wanted a multifamily loan.
His emotions blocked his reasoning. He got carried away with his love for the property, and he ended up purchasing a property that wasn’t based on sound business sense.
What is your purpose for getting a commercial property? What is your plan?
There are a number of purposes for purchasing a commercial property:
Let’s say that having a well funded retirement is very important to you. You know that commercial investing can be a very good way to have accumulation of wealth – including passive income. And commercial properties over time tend to give you increasing income from increased rents, and increased property value. Depreciation, tax advantages, etc. are other financial benefits.
2. You want to buy a commercial property that needs work and you want to upgrade it. You or a partner of yours has extensive experience in rehabbing commercial properties successfully. You understand costing and estimating, and know if the project is executed correctly, it can be highly profitable.
I must stress the importance of having experience in rehabbing commercial properties successfully. This is true for residential property rehab too. Many novices end up losing a lot of money, or just making money for the construction crew and little or possibly nothing for themselves.
3. Buy it and flip it.
This can be similar to buying a commercial property that needs work and upgrading it, because many people who buy properties and flip them also upgrade the property. But in this case you don’t hold onto the property. You sell it for a quick profit.
However – one very important thing. You may want to hold onto the property for two years to meet a major seasoning requirement. This is the requirement of holding onto the property for two years (or it may be a little less), to be able to qualify for increased appraisal value. In other words, If you purchase a commercial building and within a few months you make extensive improvements – plus you are able to raise rents appreciably, you do not get the increased appraisal value until about 2 years. You will however get increased value because of capital improvements added together with your original purchase price.
A capital improvement is the addition of a permanent structural change or the restoration of some aspect of a property that will either enhance the property's overall value, increase its useful life or adapts it to a new use.
4. You want to pass on wealth to your heirs.
You love your children and you want them to have a good life. Your motivation may be to make sure they don’t struggle financially.
However, I urge people to look at the level of financial intelligence your children have. Author Robert Kiyosaki (famous for his bestselling book called Rich Dad Poor Dad ), speaks often of financial intelligence.
The bottom of the financial intelligence scale is that your children spend the inheritance like pirates. And your estate evaporates within a few years of your children getting the inheritance.
They can be worse off than before getting the inheritance. With the inheritance they could be vulnerable to getting credit cards and accumulating debt – the “crack and cocaine” of the financial world.
The top of the scale is that your children are financially intelligent. Meaning, they are successfully saving/investing and accumulating wealth. Perhaps they give some money to charities. Most importantly, they value money, and wealth accumulation, and you feel that they will sustain the inheritance and use it wisely.
Many people do not understand that accumulation of wealth is so important not only in having money to take care of yourself, and your family, as well as the ability to be generous - but it is strongly tied to something else – your health. Robert Kiyosaki also talks about how not having enough money is actually the cause of many health problems.
It is my hope that the people I help accumulate wealth through commercial investment, give some of their profit to help others who are in need, or to other types of charitable causes. It is widely known and accepted that helping others is the strongest way by far to help ourselves.
Contact us to see if you pre-qualify for our best multifamily, commercial, construction, hard money/bridge, or business loan rates and terms. Also, contact us if you would like to discuss your particular commercial lending needs, or if you have any questions. Call 214-695-7310, or send an email to email@example.com
Bruce Painter, Director of Marketing, Business Loan Store