Have you worked in commercial real estate for years? Do you periodically walk by properties that you wish you could own? Bisnow teamed up with Avant Capital to learn more about first time property investors and what questions they should be asking themselves.
Take the quiz to see if you’re ready to take the jump and invest in a mixed-use property.
1
Which of the following commercial properties has the MOST risk for a first time investor?
An aging, overpriced downtown Manhattan building that has rent-regulated tenants.
An outer-borough mixed-use property with dense pedestrian traffic, near major transportation lines, leased by low-income tenants and discount retail. Roofing repairs needed.
A retail/residential property in a remote artist community recently featured in the New York Times but far from any existing major transportation lines.
YOU'RE CORRECT!
A remote mixed-use property is highly risky. You may need to wait several years for the community to develop. Its an investment for the young and adventurous.
An aging downtown property may not generate a big current return but you can sleep easily at night knowing that your low-risk investment is always going to be in demand.
When purchasing an outer-borough mixed-use property with low income tenants, the important thing is to have a plan in place to improve the property. Once renovations are complete you can attract ideal tenants.
YOU'RE WRONG!
A remote mixed-use property is highly risky. You may need to wait several years for the community to develop. Its an investment for the young and adventurous.
An aging downtown property may not generate a big current return but you can sleep easily at night knowing that your low-risk investment is always going to be in demand.
When purchasing an outer-borough mixed-use property with low income tenants, the important thing is to have a plan in place to improve the property. Once renovations are complete you can attract ideal tenants.
2
If you’re not ready to write the full check yourself, where are you going to get your financing?
YOU'RE CORRECT!
Bank:
Unless you have a serious relationship with a bank where you maintain a high balance, you are sure to be waiting several weeks, perhaps months, for funding, by which time your property will have been snatched up by someone else.
Equity:
Not a bad option, but tread carefully. Many new investors have lost everything by overleveraging the deal and putting their own equity at risk without realizing.
Bridge Funding:
You’d take a few months at a higher interest rate over giving away too much ownership any day. Without a prohibitive prepayment clause, you know you can simply refinance with a bank after you get the deal closed. You can be competitive with bridge funding in as little as two weeks. The best part is that the interest-only loan means that all the appreciation for the property stays with you.
YOU'RE WRONG!
Bank:
Unless you have a serious relationship with a bank where you maintain a high balance, you are sure to be waiting several weeks, perhaps months, for funding, by which time your property will have been snatched up by someone else.
Equity:
Not a bad option, but tread carefully. Many new investors have lost everything by overleveraging the deal and putting their own equity at risk without realizing.
Bridge Funding:
You’d take a few months at a higher interest rate over giving away too much ownership any day. Without a prohibitive prepayment clause, you know you can simply refinance with a bank after you get the deal closed. You can be competitive with bridge funding in as little as two weeks. The best part is that the interest-only loan means that all the appreciation for the property stays with you.
3
You just purchased a 7 residential unit building with 3 ground-floor retail units. Which of the following represents the best tenant strategy?
Consider the residents. Bring in a pharmacy, a coffee shop and a supermarket that will be convenient for the residential tenants.
Get creative. Find a major retail tenant, offer to give them 2 of the 3 ground-floor units and even the residential unit directly above to consolidate into one enormous showroom and create a major attraction in the neighborhood.
Be profit driven. Fill the ground floor with whoever will pay the highest rent, the point is to make a profit and you’re not judgmental.
YOU'RE CORRECT!
If you start with a client-first mentality, you will have no trouble filling your residential units. You will be able to select from the most desirable applicants because of the convenient retail tenants you’ve installed.
Placing your faith in a single major retail tenant could end in disaster should the tenant face bankruptcy, or simply choose to vacate.
Tenants who are willing to overpay usually do so because no one else will take them. Foreign missions and controversial retail tenants are prone to protests, community complaints and bad publicity. This can reflect negatively on your real estate asset and cause headaches for you and the residential tenants living above.
YOU'RE WRONG!
If you start with a client-first mentality, you will have no trouble filling your residential units. You will be able to select from the most desirable applicants because of the convenient retail tenants you’ve installed.
Placing your faith in a single major retail tenant could end in disaster should the tenant face bankruptcy, or simply choose to vacate.
Tenants who are willing to overpay usually do so because no one else will take them. Foreign missions and controversial retail tenants are prone to protests, community complaints and bad publicity. This can reflect negatively on your real estate asset and cause headaches for you and the residential tenants living above.
4
Which of the following investment strategies has the LEAST amount of risk?
Short-Term Momentum Play. Buy and hold onto the property and watch the value climb over the next few months before selling for a tidy profit.
Long-Term Appreciation Play. Invest in renovations, allow the rent from the tenants to pay down the mortgage and look forward to steady cash flow and inevitable appreciation in years to come.
Fix and Flip. You’re going to take the necessary steps to stabilize the property, evict problematic tenants, update furnishings, make repairs and demonstrate several months of profitable activity to make the property as attractive as possible to a new owner. Once you’ve successfully flipped that property, you’ll recycle the capital into a new project.
YOU'RE CORRECT!
A Fix and Flip is the least risky move you can make. Once you sell the property you can harvest your gains and make an investment in a new property.
With a long-term appreciation play, be careful not to overleverage. In any long-term position there is going to be a downturn and your tenants may not be able to pay rent, leaving you vulnerable to losing your equity if you can’t foot the difference.
A short-term momentum play is a perfectly legitimate strategy, just be careful of unexpected market corrections. You can mitigate risk by maintaining maximum flexibility. Never allow yourself to get locked into an agreement that precludes prepayment of your debt.
YOU'RE WRONG!
A Fix and Flip is the least risky move you can make. Once you sell the property you can harvest your gains and make an investment in a new property.
With a long-term appreciation play, be careful not to overleverage. In any long-term position there is going to be a downturn and your tenants may not be able to pay rent, leaving you vulnerable to losing your equity if you can’t foot the difference.
A short-term momentum play is a perfectly legitimate strategy, just be careful of unexpected market corrections. You can mitigate risk by maintaining maximum flexibility. Never allow yourself to get locked into an agreement that precludes prepayment of your debt.
5
Which of the following reasons is the WORST excuse for not investing in your own commercial real estate property?
Don’t know where to start
I won’t be able to find funding
What happens if I can't attract tenants?
What if the economy takes a turn for the worse?
YOU'RE CORRECT!
There are so many funding options:
• Banks are a great option for those with time to spare and pristine credit.
• Debt brokerages are great at providing creative financing solutions.
• Equity is always an option, but investing your own money is not ideal and coming to an agreement with an equity partner can be complex.
• Bridge funding is always an option for the nimble investor.
YOU'RE WRONG!
There are so many funding options:
• Banks are a great option for those with time to spare and pristine credit.
• Debt brokerages are great at providing creative financing solutions.
• Equity is always an option, but investing your own money is not ideal and coming to an agreement with an equity partner can be complex.
• Bridge funding is always an option for the nimble investor.
