March 29, 2016
In the previous blog article, we looked at some major differences between a commercial mortgage and a residential mortgage. It’s so different; it’s like a different planet.
This week we are going to look at some major things you need to know to help you successfully acquire a commercial property and commercial mortgage. The emphasis will be on acquiring a multifamily property and multifamily loan, because multifamily loans are a specialty of Apartment Loan Store.
1. Become familiar with the different terms and different parts of being involved in a commercial investment and commercial mortgage. As stated in the previous blog, there are quite a few parts and terms to a commercial investment and a commercial loan when compared to a residential loan. Three of the many such commercial investment terms are rent roll, rental concessions, and market occupancy.
I’m going to define these 3 terms now because I believe in order to be ethical, you need to define the terms you use if they may be unfamiliar to your audience.
- Rent Roll is a list of tenants – usually including the lease, expiration date, and rental rate of each one.
- Rental Concessions refers to the price and other concessions used to get new tenants to rent from you.
- Market Occupancy refers to the particular occupancy a neighborhood has. It’s the ratio of rental units rented, versus the total number in that neighborhood. A 95% market occupancy of a neighborhood means that the average occupancy of that neighborhood is 95%.
2. Select a competent commercial mortgage broker. This is of major importance. Just as in any profession, there are people who are not competent, and people who are competent, as well as people who are very competent. One thing you can do to help find a great commercial mortgage broker is to get recommendations from professional investors. A second thing you can do is get personal verbal testimonials and written references from commercial mortgage brokers.
3. In selecting a commercial property make a rational, not an emotional decision. Just like buying a stock, you do not want to be emotional in your decision. You want to be rational. If you fall in love with a property and make a decision from that attitude, you could be setting yourself up for a big financial loss. Make sound buying decisions based on numbers, and the expertise of experienced people.
4. Avoid being misled by numbers you get from the real-estate listing. At times the numbers given in a real-estate listing are based on pro-forma. This means they are a guess of what the numbers could be in the future. The advertisement may not be upfront in letting you know these numbers are pro-forma – not actual numbers. Base your buying decisions on actual numbers not future forecasts. Pro-forma numbers are not real. Check very carefully to make sure you are getting real numbers based upon actual historical data.
Investors have experienced financial disasters because of basing their buying decisions on pro-forma numbers. An example of such a financial disaster: An investor sees in the listing that the occupancy is 94%. But, the investor doesn’t check deeper to see that it is a pro-forma number. The actual occupancy is 73%. 73% occupancy is a disaster in the making unless you are an expert at investing in distressed properties, and you get the property at the value of 73% occupancy. Getting back to the investor example, he purchases the property based on these false numbers has a financial disaster. The investor loses the property.
5. Be a leader and manage your team – the seller, your realtor, your attorney, your lender, etc.
If you are a follower, you will waste time waiting for your team members to do their part. You could end up waiting for the seller to send you property financials so you know the net operating income. You might wait for your realtor to write up the offer and present it. And days could go by for your attorney to review your contract.
These are busy people and with some of them, it’s quite possible you will need to be the “squeaky wheel” who makes enough noise to get them to do their part. You need to be a leader, not a follower. This is your commercial property investment, after all.
You need to make a timeline on a calendar, and hold your team members to it. There is the saying, “Either manage the deal, or the deal will manage you.”
Contact us to see if you pre-qualify for our best multifamily, commercial, bridge, construction, 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