Draw Me Self

I already feel your skepticism. Buy commercial real estate? This year? Doesn't this guy know that vacancy rates are skyrocketing, unemployment is on the rise and market sentiment is that commercial real estate will be "the next shoe to drop"?

Actually, I do, and I want to be very precise with my strong buy recommendation. This article is specifically for business owners who are currently leasing space and who also intend to be in business for at least the next 10 years. If that's you, the remainder of 2009 may present the best buying opportunity you will see in your lifetime. Consider the following:
 
1)    You Need a Place to Operate Your Business
 
This may seem obvious, but unless you've set up shop in your home, every business needs space to operate. You've already decided to be in business, now you must choose to either rent or own your space.

Real estate rental costs are typically the third largest expense a business incurs (after payroll and taxes). On average, lease payments typically increase by 3% or more per year, every year. Finding an ideal location to purchase can convert this large, consistently growing expense into an investment that you will someday recapture, hopefully with a nice profit, when you eventually sell the property.

Furthermore, you will be the owner of all tenant improvements you make to the property and never need to worry about a lease not being renewed or having a property sold out from under your business. Don't underestimate the pride of ownership you will feel as the owner of your business and the place from which your business conducts its business.
 
2)      We Are in a Buyer's Market
 
This year is clearly a bad year for many commercial property investors; rental rates are down and vacancies are high. These investors, unlike business owners, depend on the rental income their property generates to pay the mortgage. The vast majority of investment property loans have balloon payments every 5, 7 or 10 years. In today's unstable market, banks are very conservative with property valuations and refinancing investment properties is harder than ever.

 Many investors need to sell properties, even ones with positive cash flow, due to a lack of available financing. As a consequence, there are a large number of attractive acquisition opportunities available at historically low prices relative to the cash flow they can generate.

The investor's challenge is your opportunity. As a business owner you will use your business' cash flow to cover the mortgage expense. There is a good chance that you are already spending most if not all of the mortgage payment as rent.
 
 3)     Short Term Value Fluctuations Don't Matter
 
The idea is not that your owner occupied real estate is somehow immune to down market cycles. The point is that as a business owner you don't particularly care because you have no intention of selling in the short term. Certainly all property owners hope to enjoy increasing property values, but for owner occupied properties it's not a day to day concern.
 
4)     Historically Strong Inflation Hedge
 
Commercial Real Estate has a long history of being an excellent hedge against inflation. Over the long term, commercial properties tend to increase in value at a rate approximately two percent higher than the rate of inflation. Large deficits combined with huge increases in the money supply are going to lead to high inflation at some point. It's already baked into the economic pie. When that inflation hits, your commercial property will become more valuable. Additionally, you will be paying your mortgage with dollars that are increasingly less valuable.
 
5)  Outstanding Exit Strategy Options
 
When you one day decide to retire, owning the property will provide several attractive options. You will be able to sell the business and lease the property to the buyer; sell the business with the property, increasing the business value and making the transaction easier to finance, or sell the business and the property to different buyers. 
 
6)   Make Your Accountant Happy
 
Property ownership provides many tax benefits and can help shelter business income. Interest deductions, depreciation, amortization, 1031 exchanges and other benefits will help you keep more of what you earn. Speak to your accountant to gain a better understanding on how commercial property ownership can help you keep more of your income and reduce your tax burden.
 
7)    Excellent Financing Options are Available
 
Outstanding financing options are currently available to help business owners purchase or refinance owner occupied commercial properties. Several underutilized loan programs can provide up to 90% financing for qualified projects. These loans are fully amortizing, so you never need to worry about facing a balloon payment either.
 
It's hard to get up the courage to invest in commercial real estate when the market is in turmoil, but I urge you to consider doing just that. The benefits of ownership are compelling and the timing is right.

You can find these claims all over late night television and the internet:

"You Can Become A Real Estate Investor with No Money and No Credit."

After hearing and seeing these ads, one would think that you can start buying real estate with no money out of pocket, that your credit never has to come into the picture and that three months from now, all of your financial problems are going to be over. It may sound crazy but that is exactly the attitude that many newbie investors come into this business with and it is the reason why most of them not only fail at this business, but also end up ruining their personal credit for years to come.

The fact of the matter is that investing in real estate is a business. To survive, you must treat it as such. Now what does it take to run a successful business? While there are many answers to that question depending upon the business that you are in, the one element that is required for any business is a good strong sense of financial responsibility. And what is the best indicator of your financial responsibility? The answer to that question is, of course, your personal credit.

As a businessman, mortgage lenders expect you to be more financially responsible than the average home buyer. This is why the credit requirements for investment property financing are considerably higher than those of a primary home borrower. You as a real estate investor are being held to a higher standard. An investor in today's market can expect to need to meet the following general credit requirements to get financing from a conventional lender: (keep in mind that these are general min. requirements and are not written in stone. Each lender will have its own credit and guide line requirements for financing.)

• Credit Score: a minimum 660 (a few lenders still offer programs down to a 620 score, but 660 is quickly becoming the new minimum credit score needed.)
• Credit Depth: a minimum of 3 open accounts on your credit report, in good standing and reporting for 24 months or longer
• Assets: 6 or more months PITI reserves plus funds to close.
• Employment: a stable 2 year job history (either in the same line of work or at the same company). If self employed, than you must be able to show 2 years self employment status before your income from that business can be used to qualify.

Now let's take a look at those internet and TV ads that says you don't need money or credit to buy investment real estate. Well those statements are 100% true. There are private lenders out there who will loan you the funds to purchase and rehab an investment property all in one loan. Most of these lenders will even allow you to roll the closing costs in the loan as long as the total loan amount is less than 65% to 70% of the appraised market value for that property. All of this can be done with no credit check and possibly no money out of your pocket. These lenders will offer high interest rates, high closing costs, and short terms (generally around 6 months) with a quick close and no pre payment penalty. So this makes it a good financing option for a quick "fix 'n flip" scenario.

But what happens after you purchase the property? Do you have an exit plan? What if your initial exit plan doesn't work out? Do you have a back up plan?
Let's take a look at the following example to see how this can play out:

Joe is a first time investor. He has found what he believes is a good first deal for him. Now Joe has had some problems over the years. His credit is in bad shape and he has almost no money in savings, but after reading a couple of books and maybe a real estate investment study course, he feels that he has all the angles worked out and that his lack of money and credit aren't going to cause any problems. So Joe finds himself a private lender who doesn't check his credit and he buys first investment deal without a credit check and without bringing any money to the closing table. He is a little concerned about the 16% interest rate on his new loan, but he figures he'll be able to sell the house within 90 days anyway so he can handle the extra debt for a few months. So Joe rehabs his house and puts it on the market and waits. After 5 months, Joe still has not been able to sell his house and his loan is due for repayment at 6 months. Now Joe has a real problem. He can't refinance the property and turn it into a rental because he doesn't have the credit to get the permanent financing he would need and he certainly doesn't the tens of thousands of dollars needed to pay off his loan the following month. So what happens to Joe? Mostly one of couple of things, he'll either sell the property for what he has invested in it (and in doing so will make no money off the deal) or he'll be foreclosed on by the lender.

If Joe had cleaned up and taken care of his credit before getting into the business of investing in real estate, then he quite possibly could have done a cash out refinance and not gotten himself a much lower interest rate but also pulled some equity out of the investment property to help him out until he could sell it.

This scenario is one that happens all of the time in this business and it is a perfect example of why it is absolutely essential to clean up and maintain your good credit before you get into real estate investing. Trying to buy investment properties with no money and no credit leaves you with only one exit plan and that is to "fix 'n flip" the property. However to survive in the long term, you have to have a back-up plan; something you can do to get the property generating income if it doesn't sell quickly due to slow market, bad location, etc. And almost all of these back-up plans you can come up with require that you obtain some kind of permanent financing for the house. If your personal credit is bad, then you won't be able to obtain that permanent financing and your back up plans will all fly right out the window.

The bottom line is that the business of investing in real estate is not for everyone. If it was then many more people would do it and be successful at it. Don't get emotionally tied up by some advertisement telling you that you can get into this business without any problems. Only you know whether or not you have the financial responsibility to run and maintain a business. Only you know whether or not you already pay your bills on time and take care of your monthly debts like you should. And only you know if you are ready to make the life style changes you may need to make to become that kind of person. If you can't honestly and truthfully answer those three questions, than chances are good that you are not ready to become a real estate investor.

Most often, real estate investors are the ones who think ahead and have a vision for the long term that can recognize the importance of planning for their retirement. They also know that they cannot rely on Social Security for their retirement income. It simply is not sufficient and, by retirement age, who knows how that program will have altered?

Unless you have an superbly generous retirement program, you will need to plan for the long term. You will responsible for your financial freedom in your retirement years. It may turn out that real estate is one of the most excellent ways to plan, for 5 reasons:

1. Tax benefits encourage equity growth. The tax code encourages investors to use real estate to encourage equity growth. The like-kind exchange rule helps investors hold their capital invested and prefer cash flow over capital gains. None of your equity has to be relinquished in the form of taxes. Your rents are further sheltered by depreciation. In comparison with other retirement plans, such as individual retirement accounts (IRAs) and pensions, in which income is taxed as it is withdrawn, real estate is much more flexible, allowing you to borrow based on invested equity and enabling you to manage your capital without the rules of other plans restricting access.

2. You can time your debts. You have several control over the timing of mortgage debt. You can pay off a mortgage in coordination with a planned retirement date, and the longer you have to plan, the easier it is. With mortgage acceleration, you can calculate so far ahead that you can have your debts repaid in the exact year you want to retire. And you do not need to refinance. Simply calculate the payment you have to make each month to prepay your mortgage by the planned date.

3. Real estate values have surpassed inflation. With the exception of a few economic downturns, real estate surpasses inflation most of the time. On average, real estate is certainly ahead of the cost of living. The consistency of the long-term record is reassuring. The historical increase in prices, when compared to other popular ways to invest such as the stock market, has been predictable and stable. Inflation is a force that erodes an investment portfolio's value, often producing losses in real spending power above and beyond after-tax profits. Real estate, with its combined solid market performance and annual tax benefits, overcomes this chronic problem faced by many investors.

4. Real estate is a secure investment. Buying real estate is one of the most secure ways to use and protect your capital. Market and investment risks are slight compared to other long-term investments. Cash flow risks can be mitigated with larger down payments, or through seeking properties that produce positive cash flow. And the higher your tax rate, the better your tax benefit, meaning that after-tax cash flow is affected directly. Real estate is also safe because it can be insured. Homeowner's insurance is not only required, it is one of the ways that your investment is protected from risk.

5. Real estate can be used for retirement housing. Your investment can be maintained over the years with tenants paying your mortgage while you benefit from the annual tax advantages; and then, on retirement, with your mortgage paid off, the same property can be converted to a primary residence. Thus, you can live mortgage-free in your retirement.

You will probably not find any investments offering high safety and low risk that compare with all of the advantages of real estate. This point - valid comparisons of safety and risk - often is overlooked by investors and almost always ignored by financial planners. Whenever you hear the advice to forget about accelerating your mortgage and instead put the money in to some higher-yielding investment, always make sure the comparison is a fair one that includes relative risk levels. Make valid comparison before taking advice.

Mortgage is a term used to denote the pledging of a persons property (typically) as a security when a person borrows money from the lenders. In most countries and their jurisdictions, loans secured on real estate are called mortgages. But, there are a few exceptions and few restrictions as well. There might be some jurisdictions in which only a piece of land can be mortgaged. But on the whole, mortgage generally refers to putting up your real estate as security. Thus, it is a secured loan with minimal risks to the lender.

Suppose, you have an old loan and you want to repay it. Well, then you can take a new loan to repay the outstanding debt. This, in essence, is what mortgage refinance is all about. When a person goes for a refinance loan, he/she is actually going for a secured loan. Through this process people replace an existing loan that was secured by the same assets. The most common reason why consumers go for refinancing is home mortgage. Some of the other salient reasons why people tend to go for mortgage refinance are given below:

· Refinancing goes a long way in reducing the cost of interests. Refinancing is generally done at a lower rate as compared to the other loans.

· If a person wants to pay off other debts, the refinance is the mortgage to go for.

· At times, people take a long-term loan and reduce their obligations in terms of periodic payments.

· Mortgage refinance also aids in risk reduction. Sometimes people move from a variable-rate to a fixed rate loan when they choose the refinance option.

· Many a times, people want to liquidate their entire equity, which has assimilated in real property since the time they gained ownership of their house.

Believe it or not, in some types of refinanced mortgages, you have a penalty if you repay the loan early. This can be with respect to a part repayment or the repayment of the entire loan. You are also cautioned, as far the lower interest rates are concerned. Some refinanced mortgages expose the borrower to greater risk than done so by the existing loan.

While picking a mortgage refinance you must calculate the ongoing, up-front, and the potentially variable costs that are all a part of refinancing mortgage. All these points must be considered before making a decision to go for a refinanced mortgage. Refinancing quotes also vary from region to region and depend on your credit history and other aspects like employment, duration of employment, savings history, and number of years at the existing place of residence.

Like all mortgages, mortgage refinance gives a lot of importance to credit reports. But, don't fret if you have a poor credit history. There are numerous options available in the market today that allow you to pledge your property in order to borrow cash.

Hybrid mortgages such as interest only loans, adjustable rate mortgages (ARMs), and other non-conventional mortgages are causing many people to go into foreclosure. Hybrid mortgages were given to people from all walks of life. Hybrid mortgages were mostly used to allow people to purchase more expensive houses and have a smaller monthly payment.

One of the main causes for the recent increase in the foreclosure rate is monthly payment increases. Many hybrid mortgages came with teaser rates. Teaser rates are interest rates given at the beginning of a mortgage for a short period of time. Other mortgages such as ARMs are also affecting the foreclosure rate with their adjustments. Many ARM interest rates are changing and people can not afford the new higher monthly mortgage payment.

President George W. Bush recently proposed policies designed to help slow the foreclosure rate in America. The proposal will allow people who could not qualify for FHA refinancing, to meet the FHA qualifying standards.

You can be sure that this is not the last legislation we will see that is designed to stop the foreclosure rate from increasing. Real estate is very much a part of our national economy. Excess foreclosures affect our national economy in a negative way. House prices decrease and that causes people to stay where they are and not purchase more or larger houses. It also affects the number of second homes being purchased. If people thing their property value is going to go down after they purchase, they will wait until they think the market is at its lowest point before buying.

The new proposed legislation is expected to help the real estate market and most importantly people who are falling into foreclosure and losing their homes. The problem is the proposed legislation will not help everyone losing their house to foreclosure. If you are in a situation where you need to sell your house fast to stop foreclosure then contact your local FHA office. If you do not qualify for their current refinance standards then contact your local home buyer.

It is important you know each state foreclosure laws are different. If you are getting foreclosure information from websites or magazines, you need to know that the information you are reading is relevant to the state you live in. It is much safer to contact your local home buyer and find out your options.

Local home buyers purchase many houses before they are lost to the bank and the foreclosure process. Selling your house fast will stop the foreclosure process and save your credit. Local home buyers will also let you know your options when it comes to foreclosure. It is important to know your states foreclosure law, because each state is different.