Investors Getting Financing For Investment Properties

Before addressing the above topic, I want to do a quick follow up on the last topic discussed "buying of Commercial REOs". Based on my own experience and supported by articles in the Wall Street Journal and other publication, financial institutions are currently continuing to foreclose on commercial properties and are not making them available for sales. Speaking with numerous current and former banks executives during the past week, it was made clear to me that they will continue to do that until they have no other choices. Banks / financial institutions today do not want to recognize their commercial real estate losses. However, as the economy continues to stagnate we may start seeing a change, potentially by the end of the year.

Getting financing for investment properties is one of the most challenging aspects of real estate finance in general and commercial real estate finance in particular today. Because most large financial institutions, funds, insurance companies, etc… have not yet cleaned their portfolios and recognized their losses, they are not able to invest. Two of my favorite business shows World Business News from the BBC and Bloomberg First Word have had interviews and discussions on this topic. The bottom line is that commercial investment financing is not going to come back soon. The longer it will take financial institutions to recognize their losses the longer the crisis will continue.

Here is what to do when you need to get financing for your commercial and sometimes residential investment properties, call me. Here I am being factitious but not that much really, it is difficult to get commercial financing done in general and commercial investment financing in particular because a lot of people do not have the expertise. As an example a new client of mine was looking for commercial financing on an office building for 6 months and could not find anything. He worked with banks, brokers etc… and nothing happened. However, once I started working with him, we were able to find him a solution within 2 weeks. The key to success was team effort, good financial analysis and the ability to think outside of the box.

To be successful today in getting the financing you need, it is important to be realistic and aware of the financial market conditions. My first recommendation would be to make sure investors understand that there are different type of valuations, an exchange valuation and a financing valuation. This difference applies less to residential real estate investment than to commercial. I would recommend reading my post on Cap Rate Vs. Cap Rate Vs. Cap Rate. Credit valuation is, in a lot of cases, different than Pro-Forma valuation and then there is the income component.

Another recommendation would be to be aware that rates for residential are different than for commercial. It is important to note that residential rates are artificially low. In addition, since there are limited sources of capital for commercial investment properties, it is important to focus on getting the financing done rather than to shop for the illusion of finding the greatest deal. This is true even if an investor has good credit, reserves and the property is stabilized. Today the costs of borrowing are higher than they were 2 years ago, the choices in terms or financing programs are much more limited and fewer people know how to do a proper credit evaluation and analysis. Finding an experienced team can mean the difference between financing success of failure.

My final recommendation, is for investors not to wait until the last minute before they start the financing process as it will take sometimes before the financing close. Investors need to make sure they have all the documents lined up and then be willing to work twice as hard with their financial partner to get it done. Also, if there is any problem with the property, or any other aspect of the file to be upfront so that the problem can be addressed and that there are no surprise halfway through the financing process.