Whether this is your first property investment or if you are a seasoned veteran at real estate financing and management, there are a number of things to consider when approaching a new purchase. Before you determine whether you are going to seek out various commercial real estate loans to fund your project, you must consider the risks of the property and the project.
A major part of the risk assessment that a borrower must go through when considering a real estate property investment surrounds the lender and other sponsors. Without the proper financial acumen, even great prospects and projects will struggle. Risk is a way of life in the investment world and real estate, while not nearly as dangerous as some investments, does not come without it. Commercial real estate loans involve a great deal of funding and that brings with it a lot of uncertainty. Ignoring potential risks will not make them go away and will only increase your chances for failure.
One of the risks to face head on when assessing the validity of commercial real estate loans and the investment properties is the amount of debt that the borrower is going to be incurring. Obviously, one of the unique components of real estate investing and commercial real estate loans is that you are essentially gambling that you will be able to pay off the loan in the future by using that loan to generate income. This is a very different debt structure than a typical investment. What makes this such a risk is the ever-present threat of a market downturn. The reality here is that the potential of foreclosure is not what is worrisome in this scenario. While that is not optimal, a smart borrower can overcome that, especially with the security of the property itself. But the true risk to be assessed here is the amount of personal and businesses assets that are put on the line in order to secure various commercial real estate loans. As a potential investor, you need to carefully consider how much you are opening your other assets in case of the failure of the project.
Another thing to consider as you decide whether or not to pursue commercial real estate loans is how the loan is structured. There are a variety of options here, with each carrying varying levels of risk. One of the considerations is the timetable upon which payments are made, which is often referred to as debt maturity. If you have payments scheduled to increase as the loan matures, there is a great deal of risk that you will incur as you are essentially counting on the fact that your revenue will increase. If the market takes a turn for the worse, it could end up being a very dire situation for you.
With all of these factors working against commercial real estate loans, is it even worth attempting to make money in the real estate market?
Absolutely. Again, it is important to understand that, with the exception of bonds, any sort of investment carries with it a certain degree of risk. There is just no way to eliminate that because the risk is based on factors that are entirely out of your control. However, by carefully planning and staying on top of not just your property, but the market as a whole, you will stand a very good chance to increase your revenue stream and weather any nasty downturns.
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.