Investment Property

A property that is not occupied by the owner and in most cases produces income or is held for gains from appreciation.

How to Purchase Commercial Investment Property

Many investors believe changing asset classes into commercial property represent a good alternative for repositioning a real estate portfolio. There are many ways to think about how to purchase commercial investment property. In this article we look at a few of the more interesting strategies we have seen.

The first way to think about how to purchase commercial investment property is to assume a loan already in place on the property. Obviously, the benefit of this strategy is the less cash you use to get into a transaction; the more cash is available for property upkeep and turnaround. (Keep in mind that with an assumption you will likely pay 1 point (1 percent of the loan value) to assume the loan and your finances must be approved by the lender.) But the good news is that you save time and money because the financial institution already knows the property. The other nice thing here, especially if this is a longer-term loan (10 years or more), is that you are not starting the amortization process from day one. Instead, because you pick up where the first owner left off, more of each monthly payment is devoted to principal rather than interest, so you build equity more quickly than with a new loan.

However, perhaps the lender won’t allow an assumption, or the seller owns the property free and clear. Then, a second way to think about how to purchase commercial investment property is "trust deed financing". The seller can play banker and use a trust deed to create a transaction whereby the buyer makes a lower down payment and the seller sets more flexible terms. Again, the benefits here are lower transaction costs and the opportunity for the seller to reduce interest costs. The seller can write a trust deed for any number of years and at whatever terms work for both parties. The seller might also take back a note and then cash out by selling the note.

If there is a loan in place, a third way to think about how to purchase is to “wrap” another loan around the existing loan. The seller can still carry a note by "wrapping" a new loan around the existing mortgage. With wrap financing, the original, low-interest loan stays in place and new financing from the seller or a third-party is added on.

Other avenues to obtain required funds to purchase commercial investment property:

  1. Short-term financing
  2. Investing using money borrowed from a retirement fund
  3. Investing within a ’self-directed’ IRA using a third-party IRA custodian who will purchase the property and hold it in the account

Hopefully we have given you some initial good ideas about how to purchase commercial investment property. Keep in mind that there are risks involved when sellers play banker and buyers use creative financing, but if each party engages a good attorney and tax professional to draft the documents, everyone should be in good shape and there’s a good chance the deal will get done successfully.

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