How to Purchase Underperforming Properties with construction loans

A secret strategy TURN TO LOSERS into winners

I have a question from an agent last week that give insight into a purchasing strategy that you do not use a commercial property, their current cash flow can support a loan large enough to complete their purchase can use. In other words, loan to value at 50% or less limited, since the values have shot and cap rates have declined. We see this a lot on the coasts, in the big cities and in high qualityProperties.

In this situation, we were there with an apartment in a beach community that the sale to 22 Times the current gross rent was! (I kid you not!) And believe it or not, that's a pretty standard Gross rent multiplier in the upper end of beach communities in California.

The property can only support a loan of approximately $ 1.5 million and the sale price was at 3.5 million U.S. dollars. To acquire this property "as is" would be a $ 2 million down payment andwould only be the investor a 3.7% cash on cash cap rate with its current income less () with the loan. You'd be better off, a good money market account!

However, there were two options that could take us to incorporate that look at what could be the property, not what it is. And herein is one of the most powerful finance / acquisition strategies lies with construction loans, which get one as a real estate investor.

Option 1 has the appearanceBuilding as apartments, but with better-equipped rooms, outside and in the hallways. Adding some granite counter tops, wood floors, equipment, would increase as the new owner rents about 33% to 40%. This would increase the maximum loan to almost 2.2 million U.S. dollars in the long run. We could potentially get a construction loan to acquire and renovate the property in that amount, preserving capital and increasing the buyer's back.

Option 2 involved look at thebuilding as a potential condo conversion. Condos located that close to the beach and the local towns were selling from $800,000 to $1.2 Million. There were 9 units in the building. Taking the low end of the range would give us a final sales value of $7.2 Million!!! That’s a potential profit of over $3 Million on what might amount to a $300,000 renovation and conversion. In this case, a lot of investigation remains to be done to see if this is a viable alternative. On top of that, the entire market for condominiums has been pretty soft, and it would difficult to sell the project to a financial institution at that time.

So, what is the lesson? In older held as investment property for which the current owners or properties whose owners have neglected to hard times, there is a chance for an educated real estate investor with a significant discount with high leverage purchase! Construction lending on commercial propertyusually the investor to come in at 15% to 20% of the total cost of the project if the construction loan not more than 75% to 80% of the final stabilized value. On multi-family homes and tract, the loan to cost as high as 90%.

So the next time a lender tells you "no" because a project does not generate cash flow is need of repair, or has an ownership issue had to turn the tables and think to acquire a construction loan and to add value in aStep.