How to Maximize Return on Your Commercial Real Estate Investment

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There’s always a degree of risk in any investment. However, there is a tremendous upside in that you can make great gains with a little savvy, research, knowledge, and good luck. Commercial real estate investment can offer one of the most reliable and lucrative types of real estate investment opportunities. Because of that, commercial real estate financing is readily available that can help wise investors take advantage of can’t-miss opportunities when they present themselves.

But reaping a windfall in commercial real estate involves more than just luck and available financing. There are some factors in the success of a commercial real estate investment that are within the scope of the average investor and can dramatically impact the return that is realized. Once you have commercial financing, real estate in Texas can provide you with a tremendous investment opportunity if you stack the deck in your favor. Make sure you take the following steps to maximize the success of your investment and reap the greatest rewards for your portfolio.

Follow Demand

When large national chains look to expand into new markets, one of the first things they do is look at the real estate utilized by their direct competitors. That’s why in many markets, you’ll see large box home improvement stores located right across the street from one another, or fast food franchises covering all four corners of the same intersection. The reason is simple to understand from a business perspective. Why replicate market research when your competitor has already done the work for you? Your competitor’s customers are your customers as well. When selecting a commercial investment, you can take a similar approach. Look for areas of town which are seeing booms in commercial development. If three retail strip malls have recently gone up in a one mile stretch of a bustling thoroughfare and are at capacity, there’s a good bet that the spot is well-suited for similar commercial development. Look for hot spots and find investment opportunities that are adjacent to them, but also be wary of market saturation.

Look for Multi-Use Zoning

Local zoning guidelines will limit what types of vendors or services can use your commercial space, so it’s important to try to find real estate that is zoned for multi-use. By investing in multi-use property, you’re giving yourself the widest possible tenant base and creating a wealth of options when it comes to filling your square footage with paying tenants. Diversity is a good thing when it comes to commercial real estate because it allows you to be flexible and pivot to meet the changing demand.

Shaking Hands

Examine the Norms

Again, you can learn a lot from others who are investing in commercial real estate alongside you, and it’s wise to use that knowledge when selecting and developing properties. Just as it’s a good idea to follow the demand when it comes to location, you should also find out what the norm is for space demands. For example, if there’s a lot of activity in the market for 10,000 square foot retail spaces, it wouldn’t necessarily make sense to invest in several 40,000 square foot spaces that may sit empty because they don’t meet the market need. Even the best location won’t maximize your investment if your property sits empty because it doesn’t reflect the local demand.

Use a Commercial Real Estate Broker

While many investors think they can save money by going it alone on commercial real estate selection, it’s a good idea to get an experienced commercial real estate broker involved in your investment transactions. Even if you think you have a firm handle on the market, a broker can provide you with expert advice, provide you with informed speculation about the direction the market may be going, and help with site selection. The money you spend to hire a commercial real estate broker is well worth it, so consider bringing a broker on board for your investment transactions.

By using these tips, you can create lucrative commercial real estate investments that will pay you dividends and strengthen your portfolio. To learn more about some of the things you can do to maximize your return on commercial real estate investments, contact Investor Loan Source at (409) 735-6267.

Is a Fixed or Variable Rate Best for Your Investment Loan?

Fixed vs. adjustable

There are numerous ways to make a big profit in real estate, whether you’re planning to flip homes, purchase more rental properties, or sell rental properties to tenants. However, you need a good amount of capital to do this, so it’s important to know which loans will best meet your needs. Investment lenders in Texas offer both fixed and variable rates on investment loans, so it’s important for you to know about each type to ensure you make the smartest choice. Here’s what you need to know.

Variable vs. Fixed Rates

A fixed rate loan means that you’ll lock in an interest rate that will continue for the life of the loan. Conversely, a variable rate loan has an interest rate that adjusts over time depending on the market trends. Since a fixed rate loan has the interest calculated on the principal at the same rate, the overall payment over the life of the loan never changes. The payment on a variable rate loan will change over time because the amount of interest will change as well. There are some benefits of each type of loan that you, as an investor, should consider.

How Variable Loans Work

A variable loan rate is calculated using a well-known index like the Prime Rate or LIBOR. Typically, a variable loan will be the index rate plus an additional percentage. This additional percentage will depend on your credit score. The better the score is, the smaller the additional margin is. Riskier loans or those with a lower credit score will be give a higher margin by investment lenders. Loans that have a shorter payback term also have higher rates. The payment amount can change monthly depending on the interest rate change because the change in rate changes how much will be owed over the life of the loan.

Variable Loan Cap

It’s important to understand that there’s a cap on a variable loan amount. This is to protect borrowers regardless of how high the index rate goes. The caps are generally set at a higher amount than any borrower would want to pay, but it can be significantly lower than if the rates were to go considerably higher. So the borrower always knows the maximum they’ll have to pay, even with a variable rate.

Loan approval

Fixed Rate Pros and Cons

Perhaps the biggest benefit of a fixed rate loan is that you’ll always know how much your payment will be, regardless of what the market does. These standardized, monthly payments make it easy to work within your set budget without worrying about what the next payment amount might be. It’s a much safer loan for those who don’t want to gamble on market fluctuations. The downside of this type of loan is that you might pay a higher rate than a variable loan.

Variable Rate Pros and Cons

Variable rates almost always start out with a lower interest rate than a fixed rate loan does. This is because it’s a riskier loan, so lenders make it attractive by offering lower interest rates. But this can work well for a borrower or investor who plans to pay off the loan quickly. The obvious downside is the potential for rates to go higher than that of a fixed rate loan.

Deciding on a Loan

As you’ve probably learned, unique situations dictate which type of loan is best. That’s why after carefully considering both types of loans, you should contact Investor Loan Source to learn more and decide what’s best for you.

A Loan-to-Value Ratio Guide for Real Estate Investors

Evaluate loan risk

Loan-to-value ratios are an important metric for investor real estate loans in Texas and other states. LTVs determine the amount of the loan by comparing the value of the property involved. As a real estate investor, you need to be familiar with loan-to-value ratios. Here is a guide that will help you understand the basics.

What LTV Is

Loan-to-value ratios are used by investors like you and financial institutions when processing mortgages, investor loans, or refinancing to determine whether to go forward with a loan or not. The LTV can show lenders how much risk may be involved in the investment and show investors the amount of equity you will get from the involved property. Equity refers to how much of a property you own, which is expressed as a percentage on the loan. In essence, equity is the amount you would get if you sold your property minus the amount you need to spend repaying your loan.

A high loan-to-value ratio is an excellent investor loan source that can be used to define the specifications of real estate loans, mortgages, or refinancing options. LTVs are often viewed as a benchmark for how likely payments will be made. If the LTV is too high, there are ways the ratio can be lowered. The most common way to lower an LTV ratio for investor loans is to increase the down payment.

Calculating Loan-to-Value Ratios

The calculation for loan-to-value ratios is simple. You divide the amount of the loan by the purchase price of the property, then convert the sum to a percentage. You should look at how the value of a loan compares to the purchase price or appraisal value of the property. To get a better understanding of this process, use an LTV real estate calculator. This calculator lets you figure out the variables of a real estate investor loan and make note of all possible loan-to-value ratios.

Calculate percentage

What Makes a Good Loan-to-Value Ratio?

According to the calculations, the higher the LTV ratio, the more you will pay on the property, and the lower the LTV, the less you will pay. This means that a good LTV will have a lower ratio, and there will be more equity on the property. A higher LTV can still be good, though the interest rate may be higher as well. Overall, there isn’t a specific ratio that is good, per se, but there are limits and ranges you can use when considering a specific loan.

Conforming Loan-to-Value Ratios

A conforming LTV ratio is related to mortgages on personal properties, which is regulated by the Federal Housing Financing Agency. Conforming LTVs vary depending on the number of units in a residence. The ratio will be lower for non-owner-occupied properties and commercial properties (properties with more than four units).

Nonconforming Loan-to-Value Ratios

Nonconforming LTV ratios are used by private lenders who manage real estate loans online. These loans don’t conform to government guidelines. Nonconforming LTVs vary based on the investor’s credit score and the terms of the loan. Private lenders willingly take added risks by lending to investors with poor credit and high LTVs. In exchange, lenders receive higher interest rates on the loan.

Investor Loan Source can give you more insights on loan-to-value ratios. Visit us today at our Houston or El Campo, Texas locations, email us at [email protected], or call us at 409-735-6267.