Waad Nadhir has been in the real estate business since 1989 and is an expert when it comes to real estate financing.
There are two big differences between commercial and residential financing of properties.
Lenders look at residential properties as personal residences. To qualify for a residential property loan, you need to show your creditworthiness first.
Lenders view commercial properties differently. They know that a commercial property is a place of business, which is why they are first interested in the ability of a commercial property to generate income. Your primary goal when seeking to finance for a commercial property is to show that it will bring more income than it will take in expenses and mortgage payments. Your personal qualifications come second. This means that in certain situations you may have less than ideal credit history, but your income-generating property may allow you to get a loan.
Another difference between commercial and residential real estate has to do with the down payment amount. Commercial properties typically require a down payment of at least twenty percent of the purchase price. Zero-down loans and mortgages are almost unheard-of in the commercial real estate industry. In addition to this, because the loans for commercial real estate are usually much bigger than the residential loans and the risks are higher, the rules are much stricter.
When analyzing the income from a commercial real estate property, lenders look at debt coverage ratio and loan-to-value ratio.
Debt coverage ratio is the ratio of net operating income from the property to the debt payments. Fundamentally, this ratio shows whether the property is bringing enough money to cover the debts for which it serves as collateral. The loan-to-value ratio compares the appraisal value of the property to the loan amount. A typical loan-to-value ratio incorporates the income strength of the property and the financial health of the buyer. While experienced real estate investors like Waad Nadhir may be able to make a deal because of their reputation, newbie investors need to pay very careful attention to the numbers.
Waad Nadhir has been in commercial real estate business since 1989.
The concept of return on investment or ROI is one of the most commonly used factors in evaluating real estate deals. However, this factor comes with a lot of variables and nuances.
For example, if ROI is rental income divided by the price of the building, do you measure gross income or net income? If you are talking about net income, are you looking at pre-tax or after-tax numbers? Also, do you take mortgage interest into consideration when calculating your expenses?
There are two big issues with ROI in commercial real estate investing. The first one is that there is no such thing as a generally great ROI because every investor has his own or her goals, resources and circumstances. This is why a property with an eight percent ROI can be a great deal for one investor and terrible for someone else. Secondly, ROI is just a snapshot that shows how a property is doing in the moment. It does not show or tell anything about the future.
Most beginner investors try to write down numbers on a piece of paper and work out different ratios. The problem with this approach is that they are very likely to forget something like management fees or vacancy rates that can change numbers drastically. This is why you want to create a spreadsheet that you can use every single time to get the same kind of numbers. You can also use different pieces of software that are now available on the market. This being said, it is impossible for any spreadsheet or software to tell you with absolute certainty whether you should do a deal or not. The best way to know if you should do a deal is to acquire knowledge and build extensive practical experience like Waad Nadhir did.
Waad Nadhir is dedicated to his career in commercial real estate, and he has worked hard to be where he is today. He is currently serving as the Co-Founder and President of BOSC Realty Advisors, which specializes in developing and acquiring property. He understands infill development, which is using empty space in urban areas to promote growth. Here are three problems that this process must solve.
First, urban infill developers have a much harder time finding land to use in a city or congested environment. Most of the time, these types of developers can only buy land by the parcel, which means that they could run into property owners who have no interest in selling. There is also a great deal of red tape developers have to go through to get their projects started.
Second, developers could run into social issues or disagreements amongst community members. A main argument is that the space being used for urban infill development could be used for public works that benefit the community as a whole. This could include parks or open space that allow members of the community to enjoy some part of the outdoors in their urban environment.
Third, urban infill developers can run into financial issues as well. This type of development is expensive, especially because it takes place in urban environments. It is much safer and cheaper to develop property in suburban areas than urban areas, which means it may not be financially possible for some developers.
Waad Nadhir has been working in commercial real estate development for years, and he understands the problems facing urban infill developers.