Obtaining Real Estate Investment Financing Equal To 100% Of The Purchase Price
It is not often that I have not been able to obtain real estate investment financing equal to (or sometimes much greater than) the purchase price I paid for a commercial property. It doesn't necessarily happen the day I take over the property mind you, but with 12 to 18 months I usually try to have at least 100% financing in place.
My ability to achieve this is typically dependent on two key factors:
1. Purchasing the investment property well below market value.
2. Being able to increase the value of the investment property in a short period of time.
Here is a real life example...
I came across an apartment complex for sale a few years ago in a small town that was located just outside of a city where I owned other real estate investments. The property had been on the market for some time, and was not being marketed very well. As such, the owners were getting anxious and were prepared to sell below market value. There was an existing mortgage on the property for $450,000. The term of that mortgage was over but the commercial lender was willing to leave the loan in place basically as an open mortgage until the property was refinanced. I paid $625,000 for the property (which was about $125,000 below market value), put down $175,000 and assumed the existing mortgage.
Where does the 100% real estate investment financing come into play you ask?
And why didn't I just put a higher LTV (loan to value) first mortgage on the property when I purchased it?
Well, another bonus to the property was this. The current owners had actually built the apartment building about 15 years earlier, and had held it as a rental property since then. Now, one thing you will find as you begin to look at apartment properties is that in many cases where the current owners are 'long term owners'. As a result, the building rents are sometimes way below what the market can and will command. That was the case here. The rents were 10-15% below market which offered an excellent opportunity to a new owner to raise the rents and hence the apartment property value.
In about 6 to 8 months time I had all of the rents raised which increased the gross income by about $1,000 per month (or $12,000 on an annual basis). At a 10% cap rate that translated into a $120,000 increase in the value of the apartment complex. Shortly thereafter I had the building appraised for $850,000. Then I proceeded to put a $621,000 new first mortgage in place. Within 9 months of purchasing that commercial building I had put real estate investment financing in place that was equal to 100% of the purchase price (alright 99.36% in this case but who's counting).
I was now able to take out the $175,000 that I had put down as a down payment and put it towards another commercial property. (By the way, that $175,000 came from a similar type deal that I had done the year before).
Had I not been able to purchase the property below market value and add value through the rent increases (there are also many other ways to force appreciation of commercial properties by the way) my cash would have been locked into that property until I sold it.
A final note here (and a very important one).
Even after putting 100% real estate investment financing in place, the property still produced a positive cash flow. If the cash flow from the building had not been sufficient to cover the debt payments then I would have adjusted the amount of the mortgage down to a "carriable" amount.
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