An Opportunity in Real Estate

Looking Long Term...Commercial Real Estate is Still a Viable Option

By Tony Principe

With the growing volatility in the stock market over the past year, many investors are looking for alternative investments such as real estate, which can offer greater security and control. There are many forms of real estate to consider, such as single and multi-family homes, office buildings, shopping centers, self-storage, improved or unimproved land, and mobile home parks, to mention a few.

Today, even with the credit crisis affecting most lenders, there is still viable financing available at some of the lowest interest rates in years. Most commercial lenders offer conventional financing under a couple of programs, either owner occupied or as a leased investment. The owner occupied financing has recently been most competitive through the Small Business Administration (SBA), which offers programs with as little as 10% down and blended rates as low as 5.25% A.P.R. Generally, most regional and national banks work with the SBA on their various programs being offered. Alternatively, more traditional financing for non-owner occupied property will require a down payment of between 25% and 35%, depending on the occupancy rates and condition of the property and net operating income. If the property has a high vacancy and in need of cosmetic repairs, the lender will most likely require the buyer to reserve funds to stabilize the property.

Another source of financing that is becoming more frequently used is “seller” financing. Seller financing can be in the form of a first or second trust deed and generally has no points, fees, or appraisal cost and can be completed in much shorter periods of time than the underwriting and financing process through a traditional lender.

Real estate can be purchased through various sources and entities, including tax deferred “1031” exchanges, joint ventures, limited liability corporations, and most recently through Individual Retirement Accounts, also known as “IRAs”. These are fast becoming a viable way for investors to acquire real estate. This is an excellent way to diversify their investment by acquiring a “tangible” asset vs. stocks and bonds that can be devalued or completely valueless overnight based on numerous factors outside of the investor’s control. Real estate may gain or lose value while you own it, but may continue to provide dividends and tax benefits that are not generally tied to “today’s value,” unlike stocks and bonds. There is also the ability to exchange the property through a tax deferred exchange, unlike stocks that require you to pay ordinary or capital gains tax upon the sale.

The amount of money individuals have today in their IRA accounts are quite often sufficient for a down payment or all cash purchase of a real investment. These purchases are made through a qualified IRA administrator. These IRA investments are qualified for non-owner occupied transactions. They can be financed as non-recourse loans, providing the benefit of a leveraged transaction.

With the more popular trend of commercial condominiums being built, there are numerous real estate investments in the local area, with prices starting as low as $277,000 and seller financing available. This opens up the world of investing in commercial real estate to the small investor, which was cost prohibitive in the past, unless you participated in some form of a limited partnership.

With the security, tax benefits, and long term appreciation of real estate today, it may be one of the best times ever to diversify your investments from stocks, bonds, and cash, into real estate.

As with any investment an investor should always seek the advice of a C.P.A. who is familiar with these concepts before investing.

Tony Principe has 23 years of experience at Westcord Commercial Real Estate Services. He can be contact at 805.497.4557 x236 or tony@westcord.com