Recognizing & Applying Leverage In Commercial Property

Commercial property has always been seen as a sound investment as compared to
residential real estate and for good reasons.

Though the initial investment costs of the commercial building and the costs associated with customisation for tenants are much higher, so are the overall returns.

Apart from the bigger cash inflows, investing in commercial properties also allows the investor to utilise the triple net lease thus passing the risks to the leasing business to a certain extent, something not available to the residential real estate investors.

What are the types of commercial property you can consider?

It is a common misconception that sourcing and purchasing a commercial property is hard work. Matter of fact is, it is not. Though the number of commercial properties are far fewer than the residential real estates, however, there are still plenty to go around for the smart investors who know where to look for them.

Some examples of commercial real estate are:

  1. Office buildings – This type of commercial property includes all the way from expensive downtown skyscrapers, professional office buildings to to more affordable single-tenant properties.
  2. Retail shops – This category of commercial property is probably the most common and most investors are more familiar with, which includes grocery stores, shops and even shopping malls.
  3. Leisure – Hotels, restaurants, cafes and sport facilities. You definitely know all these. 🙂

Want to invest in commercial property? Then build equity with your investment

Leverage is sorcery in commercial property investment! And leverage is actually very simple…

When the interest rate of the commercial property loan you’re paying is lower than the investment’s revenue percentage, then you’ve successfully achieved a favourable leverage!

Leveraging on commercial property loan for sound investment

Unknown to many, a great amount of cash can be found within this difference. Moreover, the better the performance of the commercial property, the more money is to be made.

It is actually remarkable to see how this basic numbers can allude to such impressive end results for the commercial property investor!

What should you look out for when using leverage?

A successful leverage with desirable outcome isn’t as difficult as many would think.

Successful leverage occurs you take up a commercial property loan where money is borrowed at a certain interest rate that is less than the rate of return on a commercial property.

Leverage is directly related to the amount of money borrowed on a deal, compared to the current value and potential value of an income producing property.

As a matter of fact, there are only a few things one needs to be mindful of when taking up a commercial property loan for your investment purpose:

  1. Long repayment period.
  2. Predetermined interest rate.

By paying the commercial property with the borrowed money, you can literally leave your money in the bank (or put it to some other revenue producing use). The best scenario is of course, when the commercial property pays for both the loan and interest, as well as return a huge sum of cash from the proceeds of the sale, which only adds to your personal wealth.

When a mortgage comes with a long life, a predetermined rate, and proportionate regular monthly repayments, the loan principal reduces after each and every payment, while simultaneously, the interest amount is lowered.

This happens because when the same amount of money is settled each month, inducing the principal amount to be paid for lower, so, in sequence, the overall amount of interest is reduced. You continue to pay the principal amount at a lower interest payment on a monthly basis.

So what would be a “good” interest rate? Well, that’s the next thing you need to consider are your investment cash inflows.

Some of the possible cash inflows you can get out from your investment in commercial property are:

  1. Renting
  2. Fees collected, e.g. parking, vending services etc.
  3. Depreciation
  4. Operating expense recoveries

Use leverage to your advantage to yield the most money from your investment without even investing your own money.

So should you go into commercial property investment immediately?

Like all investments, one shouldn’t dive headfirst into it without first understanding the benefits and pitfalls in more details.

Truth be told, leverage can be risky, especially so if the real estate does not perform as expected, and it does not yield the revenue required to settle the commercial property loan monthly repayment as well and your desired return on investment.

It is not uncommon to see unsavvy investors lose their hard earned money when the commercial properties they invested in are performing poorly.

Leverage must definitely be taken very seriously, and the property market have to be attentively minded, even more so if the commercial property loan terms are adjustable-rate rather than fixed rate.

Conclusions

Adopting leverage to your strength can mean more effective investments every single time, perhaps making it possible for you to carry out less risky deals and significantly expand your abundance in a short amount of time.

Right now there are several varieties and goals of investing in real estate, and none are not right, or more desirable than another. For the most part, the least possible amount of personal money that can be invested in the investments, the potential for larger returns.

If you had used your own hard earned cash, that sum would need to be detracted the entire amount acquired, in contrast to only a portion of the cash taken on loan.

Always keep in mind that leverage can go in an unwanted direction. Make sure to have supportive and detailed income projections to make sure that you know the financing will be covered, together with the earnings you anticipate to earn from the commercial property loan you invested in.

If you want to understand leverage in commercial property, you must really grasp what it really is, as well as the key considerations that determine if leverage is unfavourable or favourable. If not prepared properly, leverage can really obliterate the earnings generating capabilities of a commercial property and leave your income in the red!

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