Investment Real Estate
Buying real estate is always an investment and some choose to make a business out of owning property and renting it out to people and/or businesses. If a property is one to four units and used for housing, it falls under residential guidelines. If a property is five or more units or non-residential units, like a store front or storage facility, then it falls under commercial guidelines. Below are some questions people have regarding investment real estate. We assume that you have some basic knowledge of real estate, but if you don’t and are interested in learning about investment real estate, please give us a call and we will listen to your vision, educate you in this exciting field, and help make your vision a reality.
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There are laws and guidelines that distinguish the types of mortgages. For residential properties, the owner is the main focus. The owner’s assets, credit history, and income are used to determine eligibility. For commercial properties, the main emphasis is on the property itself and its economics. The owner’s credit and assets and income are secondary. If an investment property shows a strong economic framework, then investors will be happy to help finance that property. If you own commercial real estate or are looking to begin building a real estate portfolio, Go Ahead Finance is what you need to help make those ideas a reality.
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Cap Rate is one method to determine the financial risk of a property for an investor. It is calculated by dividing a property’s net operating income (NOI) by its market value. For example, if a property has a NOI of $500,000 and is said to be worth $10,000,000 then it would have a cap rate of 5.0%. Most investors want to see a cap rate of at least 4%, but it varies from region to region, depending on the market forces in real estate for those areas.
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Like a Cap Rate, the Gross Rent Multiplier, or GRM, is a rough way to compare the gross income to the value of the property. The GRM equals the property value divided by its gross rental income.
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Debt Coverage Ratios (DCR or DSCR) is a way to analyze the net operating income (NOI) with the amount of debt service on the property. It is calculated by taking the NOI of the property and dividing it by the annual debt service. The annual debt service is the monthly PITI payment times twelve. If a property has an NOI of $600,000 and the monthly debt service (or PITI payment) is $35,000/month, then annualized it would be $420,000. Then the DCR would be $600,000÷$420,000 or 1.43.
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For a commercial loan, one’s personal income needs to cover their personal debt scenario. The underwriting of a commercial property is mainly focused on the property’s performance, not necessarily the owner. Yes, the owner has to have good credit and demonstrate that they pay their debts, but that does not necessarily affect the property’s approval for a loan. Each commercial property and each person’s situation is unique, so to gain a clear understanding of what options are available for you, reach out to us today and we can help bring clarity and effective options to your and your SREO.
Additional Information and Resources
The information provided on this page and website is for informational purposes. Please apply for a loan for specific options that meet your mortgage needs.