Do you Align your Mortgage Financing with your Real Estate Strategy?
As a lender, I observed prospective borrowers often struggling with not only outlining to their lender precisely what they are using the funds for. Perhaps even more importantly, they could not really articulate their individual real estate strategy. Alignment is important.
In our blog entitled Get The Right Financing. 5 Tips to Remember, I indicated the importance of selecting the “right” lender, and of course, the “right” type of loan. By that I mean the loan most suited to your particular requirements. If you’ve bought a property with the intention of flipping it within a year, then a more conservative long term mortgage lender may not be your obvious choice. On the other hand, if you’ve acquired a property with a long term high quality tenancy, then why are you approaching a private lender for your financing, when other (likely less expensive) opportunities may be available?
Lets consider your investment strategy
Are you a “core” buyer? Perhaps you’ve acquired a property with very predictable cash flows. There is low risk here, and possibly also relatively low returns. Predictability is the name of the game. And you want to sleep like a baby! You may not need, or want, a highly leveraged situation. Perhaps a longer term Bank or Insurance Company mortgage, on a shorter amortization, is your preference.
Many buyers are what is typically called a “core plus” buyer. This is a more moderate risk profile. You’re investing in a core property, but typically some sort of enhancement is required. Your ideal lender will likely be one that offers a shorter term loan, possibly with a 25 year amortization, and perhaps also with a Line of Credit to supplement your required shorter term cash needs for property improvements
Some buyers are much more “opportunistic” or “value added”. They have identified a property which is typically medium to high risk. Acquiring a property quickly, improving in some way, often significantly, and selling it at some point for potential gain, is the business plan.
In such situations perhaps a Mezzanine lender is appropriate , or a private lender offering an interest only , or interest accruing loan (with a balloon payment upon maturity). What is critical here is timing, and executing your exit strategy (i.e. getting over the finish line), as quickly as possible.
Align your commercial mortgage financing with your real estate investment strategy. Ensure that the lending program selected is tailored to your specific needs. This will ensure the most effective use of capital, and will assist you in executing your longer term goals.