Fully understanding how financing work is critical to the success of a real estate investor. Without this knowledge, inexperienced real estate investors can find themselves being taken advantage of and falling into a series of schemes. Anyone who is truly interested in investing in commercial real estate should be sure to research their financing options carefully to ensure that they are making sound investment decisions.
Many inexperienced real estate investors are lured into believing that 0 down financing is the key to their real estate investment success. These investors fall into the trap that they are going to be able to purchase profit producing commercial real estate properties without investing any money in the financing of this purchase. This violates the first unwritten rule of real estate investing. This unwritten law dictates that if a deal sounds too good to be true, it’s probably some type of scam. One common scenario of this type of scam is that the seller is willing to finance the second mortgage enabling the investor to not put any money down. The idea of being able to purchase a profit producing property without investing any capital sounds appealing but it is important to consider why the seller would be willing to make such a deal. In many cases the seller would be interested in this type of deal because they are trying to sell the commercial property for more than it is worth. A bank or other mortgage lender would require an appraisal of the property and would not be willing to issue a mortgage for more than the profit potential of the property. The seller, however, can finance the commercial profit for more than it is worth resulting in the buyer paying more than market value for the property. This can be very risky for the real estate investor. If they purchase a commercial property for more than the monthly potential profit of the property, they may find themselves in a negative cash flow situation. In this situation the real estate investor may find that they are not only losing money on the property but may also be unable to make their monthly payments.
There are a number of factors that the lender may consider before issuing a mortgage loan. Some of these factors include the value of the profit, including the income potential, debt to income ratio, financial history and if the property is a rental property, the lender may also investigate the credit history of the tenant. These criteria help a lender to make a decision on whether or not to issue you a mortgage. You should be wary of lenders who do not consider all of these factors. Reputable lenders will be sure that you are not a high risk borrower. Their confidence in lending you money translates to a property that is likely to be profitable.
When purchasing a commercial real estate property, it is important to carefully study your financing options. Being aware of the options available to you and the advantages and disadvantages of each option will help you to make informed decisions regarding your financing.