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TOP 5 АLTЕRNАTІVЕ FІNАNСІNG AVAILABLE TO ЕNTRЕРRЕNЕURЅ

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Dr. Teresa R. Martin, Esq.

Indeed, financing is a сruсіаl piece оf thе puzzle fоr almost еvеrу buѕіnеѕѕ. Unless you hаvе ассеѕѕ tо enough саріtаl tо bооtѕtrар your buѕіnеѕѕ оr raise it frоm family and friends, chances are you’ll need a loan оr investments.

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Whеn a conventional bank lоаn іѕn’t rіght for уоu, оr іf уоu’rе lооkіng fоr аn аddіtіоnаl іnjесtіоn of саріtаl tо grоw уоur соmраnу, thеrе аrе рlеntу of оthеr орtіоnѕ. Hеrе аrе five аltеrnаtіvе wауѕ tо fіnаnсе уоur startup оr grоw уоur ѕmаll business.

1. Love Money

Thіѕ is mоnеу lоаnеd bу a ѕроuѕе, раrеntѕ, family or frіеndѕ. A bаnkеr соnѕіdеrѕ this as “раtіеnt саріtаl”, whісh іѕ money thаt wіll bе rераіd lаtеr as уоur buѕіnеѕѕ profits іnсrеаѕе.

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When borrowing lоvе mоnеу, уоu ѕhоuld bе aware thаt:

  • Family and frіеndѕ rаrеlу hаvе muсh саріtаl.
  • They mау want to hаvе equity in your business; bе sure уоu don’t gіvе thіѕ аwау.
  • A buѕіnеѕѕ relationship with fаmіlу оr frіеndѕ should never bе taken lіghtly.

2. Rеtіrеmеnt Funds

Aѕ wіth bоrrоwіng money frоm friends оr fаmіlу to buy a buѕіnеѕѕ, some mіght соnѕіdеr uѕіng mоnеу frоm a rеtіrеmеnt nest-egg rіѕkу. That ѕаіd, іt саn оftеn be аn effective wау tо invest in your еntrерrеnеurіаl endeavors аnd hаѕ hаd ѕuссеѕѕful оutсоmеѕ fоr mоrе аnd more of today’s buѕіnеѕѕ buуеrѕ. As lаіd out bу the government’s ERISA law , уоu саn іnvеѕt уоur existing IRA оr 401(k) funds tо the рurсhаѕе of a buѕіnеѕѕ wіthоut tаkіng аn еаrlу dіѕtrіbutіоn and іnсurrіng реnаltіеѕ.

It’ѕ even роѕѕіblе tо соmbіnе mоnеу frоm your rеtіrеmеnt fund with loans аnd other fundіng mеthоdѕ fоr grеаtеr flеxіbіlіtу. Mаnу еntrерrеnеurѕ choose tо іnvеѕt in a buѕіnеѕѕ thеу control because thеу believe thе grоwth opportunity іѕ greater and wаnt tо dіvеrѕіfу a роrtіоn оf their rеtіrеmеnt holdings оutѕіdе оf thе ѕtосk market.

3. Angel Іnvеѕtоrѕ

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Angel іnvеѕtоrѕ іnvеѕt in еаrlу-ѕtаgе оr ѕtаrtuр соmраnіеѕ іn еxсhаngе fоr a 20 tо 25 percent return оn thеіr іnvеѕtmеnt. Thеу hаvе helped to ѕtаrt uр many рrоmіnеnt companies, including Gооglе аnd Cоѕtсо.

Angеlѕ are generally wealthy іndіvіduаlѕ or retired соmраnу еxесutіvеѕ whо invest directly in ѕmаll firms оwnеd bу оthеrѕ. Thеу аrе often lеаdеrѕ іn their оwn field who not оnlу contribute thеіr еxреrіеnсе аnd nеtwоrk of соntасtѕ but аlѕо thеіr tесhnісаl аnd/оr mаnаgеmеnt knоwlеdgе. Angеlѕ tend to fіnаnсе thе еаrlу ѕtаgеѕ оf thе business with іnvеѕtmеntѕ іn thе order оf $25,000 tо $100,000. Institutional venture саріtаlіѕtѕ рrеfеr lаrgеr іnvеѕtmеntѕ, in thе order оf $1,000,000.

In turn for risking thеіr mоnеу, thеу reserve thе rіght tо ѕuреrvіѕе thе company’s mаnаgеmеnt practices. In concrete tеrmѕ, thіѕ оftеn іnvоlvеѕ a ѕеаt on the bоаrd оf dіrесtоrѕ аnd an assurance оf trаnѕраrеnсу.

Angеlѕ tеnd to keep a lоw profile. Tо mееt thеm, уоu hаvе tо соntасt ѕресіаlіzеd аѕѕосіаtіоnѕ or ѕеаrсh websites оn аngеlѕ.

4. Sеllеr Financing

Inсrеаѕіnglу tоdау mоrе buѕіnеѕѕ-fоr-ѕаlе trаnѕасtіоnѕ are resting оn a ѕеllеr’ѕ wіllіngnеѕѕ tо finance аt least раrt оf a sale. In a dеаl that includes ѕеllеr fіnаnсіng, the seller takes раrt оf thе purchase рrісе іn саѕh аnd the rеmаіndеr in thе fоrm оf a рrоmіѕѕоrу nоtе that the buуеr wіll рау bасk with іntеrеѕt оvеr a period of three-to-five years. Thіѕ hаѕ bесоmе еѕѕеntіаl; buуеrѕ аrе having dіffісultу ассеѕѕіng funds through trаdіtіоnаl mеthоdѕ, thеrеfоrе there’s a natural grаvіtаtіоn tоwаrd ѕеllеr-fіnаnсеd buѕіnеѕѕеѕ tо hеlр offset ѕоmе оf the cost uр frоnt.

Conversely, ѕеllеrѕ whо соntіnuе tо ѕау nо tо seller financing are fіndіng it difficult tо сlоѕе a deal, аnd as more оf thеm have rеаlіzеd thіѕ, there has bееn an іnсrеаѕе in seller-financed buѕіnеѕѕеѕ on thе mаrkеt. If you’re іn thе mаrkеt fоr a small buѕіnеѕѕ іt’ѕ іmроrtаnt to bе aware of alternate fundіng орtіоnѕ, but know thаt in some саѕеѕ it’s still possible tо bоrrоw frоm a bаnk. Government ѕtіmuluѕ аnd bаnk роlісу have bееn trуіng tо рrоmоtе ongoing ѕmаll buѕіnеѕѕ lending, аlthоugh mаnу bаnkѕ аrе still mоrе соnѕеrvаtіvе thаn thеу uѕеd tо bе аbоut when аnd to whоm thеу’ll lоаn mоnеу.

5. Crоwdfundіng

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Crоwdfundіng оn ѕіtеѕ such аѕ Kісkѕtаrtеr and Indіеgоgо саn gіvе a boost tо fіnаnсіng a ѕmаll buѕіnеѕѕ. Thеѕе ѕіtеѕ allow buѕіnеѕѕеѕ to рооl ѕmаll іnvеѕtmеntѕ frоm a numbеr оf іnvеѕtоrѕ іnѕtеаd оf hаvіng to lооk fоr a single investment.

Mаkе ѕurе to rеаd thе fіnе рrіnt оf different crowdfunding sites bеfоrе mаkіng уоur choice, аѕ ѕоmе ѕіtеѕ hаvе рауmеnt-рrосеѕѕіng fееѕ, оr rеԛuіrе buѕіnеѕѕеѕ to raise their full stated goal іn оrdеr tо keep аnу оf thе mоnеу rаіѕеd.

Tоdау’ѕ business-for-sale marketplace is full оf еxсіtіng орроrtunіtіеѕ that wіll аllоw уоu to take your dеѕtіnу іntо уоur оwn hands, аnd wіth vаrіоuѕ options аvаіlаblе thеrе’ѕ no rеаѕоn to lеt a ѕhоrtаgе of traditional capital ѕоurсеѕ gеt in the wау of уоur dreams.

 

Dr. Teresa R Martin

Dr. Teresa R Martin, Esq. is a Motivational Speaker, Author, Million Dollar Real Estate Wealth Coach, Business Strategist, and Legal Counsel. She is living the life she loves and can teach you how to do the same!

As Founder of the Generational Wealth Zone Group, Teresa Martin formed the original vision for a group of companies that would help clients create, manage, protect and grow their wealth. She is dedicated to showing individuals and entrepreneurs how to become financially empowered by turning the work they love into a profitable and sustainable business.

7 Personal Finance Questions to Ask Yourself Before Getting a Mortgage

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By Dr. Teresa R. Martin, Esq.

Are you ready for a mortgage? It’s a big step that requires careful planning. A mortgage will affect your financial future for years to come.

Before you sign that mortgage, consider these finance questions:

  1. What is your credit score? Credit scores affect mortgage rates.
  • Before buying a house, check your credit score. Should you raise your score to get a better interest rate? In general, high scores with no late payments during the last three years are enough to get good rates.
  1. Are you capable of handling maintenance costs? It’s important to consider the cost of maintenance before buying a house.
  • The mortgage is only one part of the total cost of owning a house. Maintenance is another important piece. Will you be able to pay for a new roof or air conditioning system when the current ones wear out?
  • Does your monthly budget include enough savings for maintenance?
  • It’s also important to consider DIY projects and hiring others to complete tasks. House maintenance can involve expensive and ongoing projects. Are you ready to pay for these costs?
  1. How secure is your job? Before signing a loan, evaluate your job security. Will the work last? How will you handle changes?

  • Evaluating your job future is part of planning for a home purchase.
  • Consider emergency funds and savings in your plan. If your job situation changes, will you be able to continue making monthly mortgage payments?
  1. Do you have the necessary financial paperwork? Mortgage applications require a great amount of paperwork. Lenders can ask for old tax statements, check stubs, savings account statements, and other information.
  • If you have a high credit score, you may get a no documentation loan.
  • It’s rare to get a no documentation loan, so it’s better to be prepared by checking your files and collecting the financial papers you may need.
  1. Did you calculate the hidden expenses of owning a home? Home ownership comes with multiple expenses that go beyond appraisal fees, property taxes, mortgage closing costs, and insurance.

  • One of the hidden expenses of moving to a home is more bills. If you’re used to renting, then home ownership can change your monthly bills by adding new ones. You’ll add trash collection, water, recycling and sewage in most locations to the expense list.
  • Home insurance is higher than renter’s insurance. In addition, older homes cost more.
  • Homeowners’ association fees are becoming more common in neighborhoods. You may be aware of condominium association fees, but are you ready to pay homeowners’ fees?
  1. Do you have an emergency fund? Emergencies can vary from broken dryers to flooded patios, so you need to be ready for anything. Is your emergency fund big enough to handle common, unplanned expenses?
  • Emergency funds are a better option than credit cards or loans. Putting enough money aside can help you avoid new debt.

  1. Are you applying for other credit? Mortgage lenders can see applications for other types of loans on your credit report.
  • Applying for other types of credit while trying to get a mortgage can hurt your loan. Mortgage companies view these applications as risks, so it’s better to wait before trying to get another credit card.
  • Applications for new credit lower your credit score and affect interest rates.

A mortgage is a responsibility that affects multiple areas of your financial life. Before you buy a house, consider how your current financial situation will be affected and plan for emergencies.

Dr. Teresa R. Martin, Esq.

Dr. Teresa R. Martin, Esq. is the founder of Real Estate Investors Association of NYC (REIA NYC). REIA NYC (www.reianyc.org) is a premier real estate investment association serving the New York City marketplace. Its primary focus and mission is “helping our members build, preserve, and harvest multi-generational wealth” in the areas of real estate investments, business ownership and personal development.

 

Fire Your Real Estate Banker!

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By Mark Willis, CFPⓇ​
Lake Growth Financial Services

“A banker is a fellow who will lend you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” — Mark Twain

Ain’t that the truth? As we look ten years back on the Great Recession, we can see how much has changed, and how much more has stayed pretty much the same. Home values are up again to 2007 levels. Unemployment is down to pre-crisis levels. The stock market is hitting record highs as I write these words. And yet, not much has changed since 2008 or since Mr. Twain wrote those humorous words – bankers control the money supply, and just when you need the money most, they are there holding all the umbrellas.

I have no problem with bankers, personally. Some of my best friends are bankers!

In fact, as investors we’ve been taught to use “other people’s money” (also known as OPM) as leverage to help us gain traction in real estate or to get ahead in our business. Other solutions include getting a business line of credit to buy new equipment, or securing a mortgage on an investment property to renovate and flip a property. These are the standby solutions used by many Americans.

But ask yourself – who are the “other people” when OPM is your strategy for leverage? (Remember, leverage can work both ways – for ​and​against you!) And what do other people want so badly that they’re willing to part with their money and hand it to you? Were you just handed an umbrella on a sunny day?

When banks control the environment where your money lives, they win every time. When you control the financial environment in which your money lives, you win.

34% of all American income goes to servicing debt. If time is money, as the old saying goes, that means a full one-third of the day is spent working as slaves to a bank! Think of how many folks you know who are in debt up to their eyeballs and working 60+ hours a week, or stressing over non-paying tenants, or feverishly rushing from property to property, hoping they can sell a property before the balloon payment comes due.

For many real estate investors, the road to becoming a wealthy landlord turned south toward the highway of serfdom, with their banker holding the upper hand.

Is there any other way? How can someone who has skill and passion for real estate or their business keep control and a sense of sanity amidst a world gone insane? Is there a way to break free of financial slavery to the banks?

Yes, it’s simple.

Fire your banker!

Where is it written that you have to service your debts and pay off a banker before you can enjoy the fruits of your investment? Who says you have to pay interest on your properties, effectively turning all your real estate assets into liabilities? Where did we get the idea that banks were the only ones who could provide the function of banking in our society?

You can be your own source of financing – you can rid your financial portfolio of your banker and provide the function of banking yourself.

How? The answer may shock you. I’m talking about a modernized form of dividend-paying whole life insurance. It works like a source of capital, a bank, to provide a guaranteed pool of money liquid and available for whatever you need. The funds you accumulate in your life insurance grow safely and predictably every year, guaranteed – no matter what’s happening in the stock market. You can use the equity in your policy like a line of credit to yourself – and you have complete control over how, when and if you pay your money back to your policy. You are in complete control of the entire process.

When most people see the words: whole life insurance, their mind turns off. Mine sure did! I was taught to avoid whole life insurance even in my earliest days as a financial planner. Since then, I’ve come to see how useful and valuable a ​properly structured, dividend-paying​whole life policy can be, when issued from a mutual life insurance company that offers non-direct recognition loans. This vehicle helps my clients overcome the inertia of opportunity cost, accumulate a powerful warchest of capital, and deploy liquid capital for their real estate ventures.

It matters where your money lives. As a CERTIFIED FINANCIAL PLANNER™ I have investigated nearly every financial strategy available to investors. Well over 400+ products are available and tens of thousands of uses of those products have been hocked and sold to folks looking for that golden goose that will just help them sleep better at night. Financial pundits and Wall Street advisors will tell you that whole life insurance is the devil, and while I’m sure I’ll be ostracized by mainstream financial advisors for saying this, I think every person should at least KNOW that becoming your own source of financing through a properly structured whole life policy is an option worth investigating for yourself. Besides, if mainstream financial advice got us into the mess we are in, maybe it’s time for a new way of thinking!

We’ve had two major market crashes since the year 2000. Do you think another one will happen in your lifetime? Do you want your reaction to the next market crash to be the same as the last one? If you’d like to not only protect yourself from the next recession, but actually anticipate and take advantage of it, prepare for it now by doing what the banks do, not doing what they tell you to do. Banks purchase a huge amount of life insurance to run their businesses. Prepare by becoming the banker by using a form of capital that banks themselves take advantage of (Google “Bank Owned Life Insurance” to see what I mean).

Imagine we’re in the middle of another financial calamity. Everyone is seeing their 401(k) values drop and real estate prices are plummeting. Your friends are nervous about losing their jobs.

But instead of fear and instead of begging a banker to lend you his umbrella, you’ve established yourself as your own source of capital, using the cash value in your properly designed life insurance policy. You’re in control. When you see the real estate values crashing, instead of fear, you see opportunity. You borrow from your own policy’s cash, and within 3-5 days your policy’s cash value is direct deposited into your bank account and you’ve got cash at closing. No tax obligations, no government red tape. You are in control.

With this kind of leverage, the kind of leverage you own, you can borrow from your policy and still have it earning interest as if you did not take the loan. You read that right. That’s a rare feature often misunderstood and overlooked by most insurance agents. And when it’s properly implemented into a policy, you overcome the biggest hurdle in the financial universe – opportunity cost, and giving you uninterrupted compound growth – what has been referred to as the 8th Wonder of the World. You can pay your policy back on your own terms, when and if you choose. Do you think that will make you more or less competitive as an investor? Could this help you with more than just investing? How about buying the stuff of life – cars, medical expenses, paying off debt… which financial situation would it NOT make sense to be the banker?

The only thing better than being debt free is to be the banker. Then you’re the one lending the umbrellas!

There’s more to this than just picking up the phone to call your local insurance guy. Most insurance agents (and certainly most Wall Street brokers) have ​never​heard of this strategy, and you don’t want to put your money with an “I’ll just Google it” advisor. If you’d like to talk to someone who has been specially trained and authorized to specifically design a Bank on Yourself policy as described above, please contact us at ​[email protected]​or call us at 1-800-962-9141.

Free Money….. No, Really! It’s True!

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By Reggie Brooks

Our Government makes hundreds of different programs available to distribute billions of dollars to us in the form of grants, low interest loans, and subsidies. The money is then appropriated by politicians who are smart enough to know that the best way to keep their jobs is by funneling Government money into the communities they serve. That’s where we can step up and reclaim our money.

It’s Our Money Anyway

I say reclaim because it’s our money in the first place. The Government takes the money from us in the form of taxes, then gives it back to us in the form of grants, low interest loans, and subsidies. Here’s the kicker…The Government only gives the money back to the people who learn how to get it. You have to learn how to ask for it! If you can follow instructions on an application, the chances are pretty good that you can get a grant for something.

Free Money For Almost Anything

Do you have an idea for a business? Want to invent something? Need help with living expenses? Want to change your career? Want to buy or fix up real estate? There is Government, Corporate or Foundation money that can help.

How about $30,000 to tag Grizzly Bears. Not that daring? How about $96,000 to study fish. Or $43,000 to become a French Chef. Or over $148,000 to rehab an apartment building. Sound too good to be true? Well, it’s not. There are far greater stories.

Uncle Sam Can Be Your Very Generous Partner!

You have to see the bigger picture. To us real estate investors, Uncle Sam is our best friend and a great financial supporter. If you’re a beginning investor, Uncle Sam’s going to help you by guaranteeing that you get a decent loan to buy your first house or apartment building. There are many first time homebuyer programs that were created for that purpose. If you’re having trouble coming up with enough money for a down payment, he makes it possible for you to buy with a 3% down payment (FHA), or a 0% down payment (VA). Then he makes the IRS give us a lot of tax breaks because we now own property. He even helps people in areas where people have trouble paying their rent under the Section 8 Subsidy Program. Our partner, the American Government encourages us to keep America strong by using these programs. When you learn how to use these programs, the financial rewards can be substantial.

Let The Government Help You To Make Money

Of the many different types of financial assistance available to us, I especially like the Rental Rehab Loan Program. Here how it worked for me. Several years ago, I purchased a four unit building that had my friends wondering if I had lost my mind. The units were one bedroom, one bathroom each, and were inhabited by four elderly ladies who had been living there from 21 to 24 years. The problem was that their rent had never been raised! The total income from that building was around $460 per month! FOR THE ENTIRE BUILDING!! No, I’m not crazy. I did my homework and I found a Government program called the Rental Rehab Loan Program. The program required that I borrow at least $5000 to be used for upgrades in the building. The benefit to me was that I received the money at a very low interest rate, and (much more importantly) the tenants would qualify to go on the Section 8 Government Subsidy Program!

A Great Win-Win-Win Deal

All four of my elderly tenants were existing on a very meager social security income. They lived in the fear that whoever buys the building will want to raise the rent. They knew that the market rent was around $625 per month, and they knew that they could not afford it. They all thought that they’d end up homeless on the streets. They had no idea that these wonderful Government programs existed. I borrowing as close to $5000 as I could (I wanted to maximize my cash flow), and started the work on the property. When it was all over, I ended up with a really nice building with 4 wonderful senior citizens as tenants. I increased the income from the building from $460 per month to around $2600 per month thanks to my partner, Uncle Sam.

Everyone Was A Winner

Everyone won in this deal. The Government won because they were able to get the money out into the community where it could do some good. The tenants won because they were able to stay in the homes they’ve been in for over 20 years. They actually ended up paying less toward their rent because of the Section 8 Subsidy. I obviously won because I was able to take a non-performing piece of property and turn it into a success. Thank you, Uncle Sam!

Do I Need To Have Good Credit?

That depends on which of the many programs you’re applying for. There are some programs that are project based. In other words, if your project fits a certain category, the project itself can qualify for the money. It could be the real estate, the area, the tenants, or the business that qualifies, not you personally. If it’s a program that requires you to personally qualify, then your credit can become a factor. But understand this. There are programs that are designed for people with bad credit. There are even programs that require you to be turned down by a bank before you can qualify for the money!

So, How Do I Go About Getting This Free Money?

I’m going to give you a thumbnail sketch of how to go about getting this free Money. My obvious limitation is that I don’t have a full day to teach you in great detail. My hope is that what I share with you in these pages begins your great adventure in getting this money. As you begin your wonderful journey, please understand that there is a degree of work that is necessary. You may find that many phone calls and follow up are required to nail down that particular grant you’ve been pursuing. Make the phone calls. Do your follow up work.

You may find that the program is no longer in existence. Don’t despair. There may be 2 or 3 other programs under different names that have replaced the cancelled program. So don’t quit. There are so many different Government programs. Thousands of ways to qualify under different application processes. There are thousands of different corporation grant funds, foundation grant programs and non-profit organizational grant programs. If you can’t qualify for 1 program, there might be 5, 10, 25, or 50 other programs that you can qualify for.

Use The Resources That Are At Your Fingertips

The first thing to do will be to make contact with the organizations that provide the money. One of the best sources to find these organization is your public library. Ask the librarian to help you locate Corporate and Foundation Grant Sources. There are literally thousands of corporations and foundations that give away money every year. Why? Because our system makes it very attractive for corporations who earn a lot of money to give it away and write it off rather than keep it and be taxed on it. And when you factor in the great PR they get for giving money away, it’s a pretty good win-win deal.

Your Project Should Be Within The Grant Giver’s Guidelines

Once you’ve made your initial contact with a potential funding source, ask them to send you all the information they have on their grant criteria. It will more than likely come to you in the form of applications and guidelines. These guidelines will usually lay out what it takes to get funding from them. Your project must fit their funding criteria. If it doesn’t, go and find another source for funding.

Requesting Your Grant

When you’re ready to request your grant you’ll need to do so using two documents. One is a Grant Proposal, and the other is the Letter of Appeal. The difference between the two documents is that the Letter of Appeal is a summary of the Grant Proposal. If you’re requesting a grant of $2,500 or less, you can usually accomplish that by using the Letter of Appeal only. If you’re looking for more, you’ll have to use the Grant Proposal and the Letter of Appeal.

When you find the right funding source for your project, this is when you write your proposal and your appeal letters. Submit your proposal to as many funding sources as you can find. There are not many restrictions on the number of grants that you can receive. Why not get five grants instead of one? Why not ten grants instead of five. Get the picture?

Remember, You Are Entitled To This Money!

As I mentioned before, these are your tax dollars at work. Do not feel guilty! It’s your money in the first place! Uncle Sam is a very generous partner who wants to keep America strong. He does this by making funds available to be used for specific purposes. Some of those “purposes” that Uncle Sam allocates billions of dollars for are in the area of real estate, small businesses, and education. I challenge you to learn about the programs that are available for you and take advantage of them. They are there for you to use, but only if you’re willing to learn how to use them. Have a grand – Grant Adventure!

 

Reggie Brooks

Reggie Brooks, is an international speaker, author and educator, dedicated to inspiring others to achieve personal success through real estate investment. He is also the #1 Vacant, Abandoned & Distressed Property Specialist in North America.

Having risen above a life of poverty, he has achieved what many people consider to be impossible. He went from making $36,000 per year at the local telephone company, to making over $40,000 per month in his real estate business. Today, Reggie delivers his personal philosophies for success at major business venues and expositions throughout the United States. Reggie attributes his success to faith, dedication to success, and to the invaluable coaches he has had along the way.

The TOP FIVE Reasons to Consider COMMERCIAL REAL ESTATE for Your Portfolio

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By Tom K. Wilson

While many investors see single-family homes as their “bread-and-butter” investment, investing in commercial properties is an option that can also help you achieve your financial goals.

“Commercial” in its broadest lay vernacular includes multifamily apartments, however, the true industry definition separates multifamily properties (over five residential units) from true commercial, such as retail, office space, industrial, self-storage or medical centers.

I’m often asked what kinds of properties I recommend. There is, of course, no one size that fits all investors or markets. While in a normal market multifamily properties are a natural progression from single family homes, this is anything but a normal market and currently there are too many multifamily buyers chasing too few deals, so it currently has lower CAP* rates or returns than pure commercial.

Here are five reasons to consider commercial properties for your portfolio.

#1 HIGHER ROI

Commercial properties often have higher and more predictable return-oninvestment than single-family homes, in part due to the economies of scale from investing in a larger property not usually available to the small investor.

For example, a current commercial retail center that we are acquiring has an 8.2 CAP rate and a four-year internal rate of return* of 12.0%. When you can borrow money at 4.25% and invest it in something yielding 12.0%, that’s worth considering!

#2 FEWER HEADACHES

It’s generally easier to manage one large property through a professional property management firm than to manage scattered single-family homes. Also the business tenants you get in retail or office space are usually of higher quality than most residential tenants. Business tenants have higher credit/risk scores, have pride of ownership in their businesses and want to protect their livelihoods. As a result, they have an interest in taking care of the property.

Many commercial properties are NNN* (triple net), so the tenant pays most of the expenses including taxes, insurance, and maintenance making the owner’s expenses very predictable and consistent.

#3 STABLE CASH FLOW

Commercial leases are typically 5-10 years in length vs. annually for single-family homes. Additionally, commercial leases include annual bumps in rent and options to-renew. As a result of all these factors, cash flows are more predictable.

#4 NO 10-MORTGAGE FANNIE MAE LIMIT

Any loans taken by the owner or syndicate do not count against your 10-mortgage limit because they are in the name of the owning entity and not on your personal credit. This enables you to put more of your capital to work.

#5 APPRECIATION MULTIPLIERS

Unlike single-family homes, which are strictly valued based on market demand, or ‘sales comps’, commercial properties are valued as a multiple of their Net Operating Income (NOI),* which can be driven up by a good property manager’s addition of value. At a Cap Rate* of 8.0,everyone-dollar increase in annual NOI can result in $12.50 of appreciation!

Steps you can take to actively improve NOI include:

  • Upgrading the existing buildings
  • Increasing TI (tenant improvement)
  • Adding leasable square footage
  • Raising rents
  • Reducing operating expenses
  • Adding amenities
  • Adding additional revenue generating resources (ATM kiosk), and many more

Rather than wait for market forces to raise real estate prices organically, you can create appreciation using levers like the ones listed above.

ADDITIONAL BENEFITS

Of course, the five advantages of commercial real estate listed above are in addition to the usual benefits of any real estate investment:

  • Tax Benefits
  • Hedge against inflation
  • A hard asset with intrinsic value

Caveats of Commercial Investing

No discussion of commercial investing would be complete without noting a few issues that investors should be aware of.

Financing can be more challenging

Typically, the investor(s) must put down 25-30% of the sales price and finance the loan amount over a 5-10 year term with a balloon payment at the end of the term. Selling or refinancing options at that time will vary depending on market conditions. And there can be stiff prepayment penalties.

Not as Liquid

If you own 10% of a Commercial building and want to sell your interest, you can sell to your fellow investors (who usually get first right of refusal) but if none are interested, it may be difficult to get out of the investment. That is why long-term funds, like IRA money, are ideal for commercial properties.

Sale of a Commercial Property can take longer

While just about everyone wants a home, only a small percentage of the population is capable of purchasing a retail center or office building. The smaller market of potential buyers coupled with a detailed due diligence process means that the sale of the property can take longer than for a single-family home.

Syndications

Many of the challenges outlined above can be mitigated by investing with an experienced syndicator. Their knowledge, track record, and ability to qualify for the loan and manage the property, allows the small investor to participate in a high quality commercial property or to invest in multiple projects to distribute their risks.

SUMMARY

The benefits, economies of scale, opportunities for forced appreciation and higher returns make commercial properties an attractive addition to most investors’ portfolio, and one worthy of serious consideration.

For your free copy of Wilson Investment Properties article “Are Real Estate Syndications for You?” and a guide to “Commercial Real Estate Terms” please go to our website, www.TomWilsonProperties.com .

Tom K. Wilson has utilized his experience and skills acquired in 30 years of managing some of Silicon Valley’s pioneering high tech companies to buy and sell more than 2,500 units and over $130 million of real estate, including three condo conversion projects, eight syndications, and seven multifamily properties. He founded and owns Wilson Investment Properties, Inc., a company that has provided over 500 high cash flow, high-quality, rehabbed and leased residential properties to investors. Active in real estate associations, Mr. Wilson is a frequent speaker on real estate investing where his expertise and experience makes him an audience favorite. He is the weekly host of the Wed 2pm edition of KDOW’s RE Radio Live in San Francisco, the Wall Street Business Network (1220am).

*A GLOSSARY OF COMMERCIAL TERMS

CAP RATE (Capitalization Rate)

A measure of return calculated by dividing the property’s net operating income by its purchase price.

CONC (Cash on Cash Return)

A measure of return calculated by dividing pre-tax cash flow from a property by the total cash invested (e.g., down payment plus closing costs).

GRM (Gross Rent Multiplier)

The Gross Rent Multiplier is a measure of how expensive a commercial property is relative to the gross rents it brings in, calculated as: GRM = Purchase price of the property / Gross monthly rents.

NOI (Net Operating Income)

The total income from a property minus vacancy, credit losses, and operating expenses.

NNN (Triple Net)

A commercial lease in which the tenant pays three operating expenses (in addition to rent): Property taxes, insurance, and maintenance.

ROI (Return on Investment)

ROI measures the amount of return on an investment relative to the investment’s cost and is calculated as: ROI % = (Gain from the investment – Cost of the investment) / Cost of the investment.