Group Investing is now Hip!

The following article is from an article by Jerry Anderson, CCIM.

---------

By Jerry Anderson, CCIM

I am so tired of reading and hearing the bad news in the industry of my passion - commercial real estate, that I've stopped talking to nay sayers and am taking proactive aggressive action. We all know values have tanked, but how can we personally take advantage and help our clients through the maze? Lenders are not any fun to deal with these days. Any type of what we used to consider reasonable leverage seems impossible. What precious stash of cash we do have, we are not willing to risk on one particular deal, so forget 50%-60% down and borrowing the balance with unreasonable terms and high closing costs. Success in commercial real estate investment is usually a matter of how fast you can adapt to changes that create opportunity. The only position to occupy in today's market is that of buyer; a buyer with cash that can perform quickly. The answer lies not in borrowing to buy assets like in the past, but reversing the leverage scenario – yes, put in MORE cash. But diversification and partners is the key.

Group investing has been around a long time. I was a General Partner in many partnerships in the 70's and 80's and got away from it when money became so easy to borrow. The heck with borrowing from lenders, organize small groups and put a boatload of money down, if not pay all cash. Don't put too much in any one deal and raise enough to weather any storm on the horizon. If you are going to capitalize on the market we find ourselves in right now – adapt! More cash, less leverage and keep it simple without depending on the future - buy based on, quality of the asset and location, cash flow and a low % of what it would cost to replace the structure. I've preached that quality; quantity and durability of the income stream are the three legs of any commercial real estate investment for years. It is never truer than now.

For an overview of group investing visit www.groupsponsor.com I have no affiliation whatsoever with Gene Trowbridge, CCIM but have used his material and known he and his organization for over 25 years. His information is a good place to start and your local Commercial Real Estate advisor; local legal counsel and accounting professionals are the next step. Good luck. Go slow be deliberate. As a friend of mine says - Pigs get fat and hogs get slaughtered.

Banks are still making loans

by Ken Pirok
Business Consultant
www.kenpirok.com

Banks are still making loans. It may be a bit tougher to get approved these days, but low property values and low interest rates are creating opportunities in real estate. It is, perhaps, more important than ever to understand how banks approve commercial loans and to be savvy when it comes to applying for a mortgage.

Contrary to popular belief, the collateral value of your property is not the primary concern of the bank. Liquidation of collateral only happens when loans go bad. The primary source of repayment and the most important factor to your bank is cash flow. Most banks measure cash flow using the Debt Service Coverage Ratio.

Debt Service Coverage Ratio = Net Operating Income ÷ Annual Debt Service

Net operating income or "NOI" includes all cash income, expenses, and taxes, and it is presented on an annual basis. NOI excludes non-cash expenses such as depreciation, and it also excludes interest expense, since interest is included in the denominator of the ratio. For prior years, you will provide the bank with your actual numbers. For future periods, you should assume some reasonable amount of vacancy and bad debt in your calculations.

The annual debt service requirement includes all scheduled principal and interest payments on any mortgages for a property. Banks usually prefer to see debt service coverage of at least 125% as a cushion in case times get tough.

The secondary source of repayment is collateral, which is a backup to the bank. Banks measure the collateral value of properties using the loan to value ratio or "LTV".

Loan to Value = Mortgage Principal Balance ÷ Appraised Value of Property

Obviously, banks like to see loan to values of at least seventy-five or eighty percent, but sometimes if the cash flow looks good, and the property is marketable, a bank might loan even an even greater amount.

Here are a few hints to help you maximize the debt service coverage ratio or appraised value of your property. Tell your banker or your appraiser about any discretionary or unusual expenses. Maybe you paid your brother-in-law a lot more than the going rate to paint your property, or you provided extra landscaping and a garden at your apartment building, or maybe you donated money to charity. You can create "pro forma" financial statements showing what your cash flow would look like if you had not incurred such hefty expenses. You don't want to be penalized for going the extra mile.

Watch your depreciation too. If you have assets with accelerated depreciation schedules or if the IRS allows you a big write-off when you purchase a piece of equipment or remodel a unit, then tell your banker or your appraiser. They may add back some of the depreciation or expense to your NOI.

A third and final source of repayment to the bank is your personal assets and resources, which the bank ties up using a personal guarantee or by requiring your signature on the mortgage as an individual.

When you apply for a mortgage, the bank will ask you to fill out a personal financial statement, which they will use to measure your personal wherewithal. Before you turn this form in to them, be sure to double check your math. You would be surprised how many people submit numbers that just don't add up.

If you would like to learn more about commercial borrowing, visit www.kenpirok.com or call us at 217.840.7726.

New Central Illinois Business episode, May 2, 2009, featuring Sandy Cirillo Barnes and Tim Hoerr

Central Illinois Business with Alex Ruggieri

Episode 41, May 2nd   Featuring...
Sandy Cirillo Barnes and Tim Hoerr

Browse all episodes of One on One or Central Illinois Business

Market update for June 14, 2009

Welcome to the 4th issue (Volume 1, Issue 4) of the Sperry Van Ness | Better Capital Partners-Capital Market and Interest Rate Update Newsletter. For those readers that missed our first few issues, each week or so we will provide our readers with an overview of the following: National commercial real estate interest rates and underwriting for the major property types, marketplace conditions and how they affect various property types nationwide, insightful capital market analysis with a personal viewpoint and focused subject matter in every newsletter.

Read full article.