For many business owners, real estate has become the investment vehicle of choice for funding everything from growth and expansion to future retirement needs. But, according to Brad J. Pascarella, a commercial loan officer at Brentwood Bank, there’s more to real estate investment than accumulating properties.
“The servicing for property taxes, the periodic repricing of debt, the ultimate role those investments will play in funding retirement or serving as future collateral these are just some of the issues every investor has to anticipate,” Pascarella says.
Smart Business spoke to Pascarella about a bank’s role in servicing real estate investors and the other benefits a specialized investment property lender can bring to the table.
How does it pay to seek out a bank that specializes in funding investment properties?
Many banks can underwrite a loan for any given commercial or investment property, but very few will escrow for taxes. Given the demands of day-to-day operations on a business owner’s time and attention, that’s just one example of a convenience the investor should look for if only because it’s a way to tell if the bank is capable of servicing the loan in any kind of specialized sense. Likewise, if you’re dealing with a unique set of circumstances, a bank that can custom-tailor certain loan terms and conditions can be a real difference-maker. For instance, if you own property in a partnership and your partners unexpectedly need you to buy them out ahead of schedule and it happens at the worst possible time for you, it’s understandable that you may need special loan term considerations. A smaller, specialized lender is simply going to be in a better position to accommodate you, and better equipped to guide you through the process.
What characteristics should investors consider when funding investment properties?
The financial institution’s size, decision-making hierarchy and approval process will all have an impact for better or worse. As a general rule, don’t assume you can turnkey a deal quickly at a larger institution. And don’t assume it will become easier to handle future deals once the initial relationship is established. It’s not unusual for investors who work with larger institutions to find themselves starting from scratch with each subsequent transaction and that can be frustrating. If the bank isn’t getting back to you and you’re starting to feel neglected or you find yourself answering the same question over and over, that’s a good sign it’s time to look elsewhere. The more the timing of the transaction matters or communication matters or special considerations will need to be addressed, the more you will benefit from working one on one within a smaller organization that can offer both flexibility and the ability to turnkey your loan approval. When changes occur or issues come up at the last minute, even the most complex kinds of real estate transactions can be processed faster and more smoothly there are simply fewer departmental layers involved. In these situations, especially, the advantages of working directly with loan decision-makers (rather than intermediaries) are magnified.
What opportunities currently exist for the investor who already holds properties?
It’s never a bad idea to ask someone to take a look at your portfolio especially today, given the rate environment. You may have bullets getting ready to balloon at the end of their five- and 10-year terms typical with larger properties that would be better to refinance. You may also want to consider securing new financing that automatically reprices at current market levels as an alternative to when your bullet comes due. All of this depends on how you plan to use the property in question, of course. Whether you plan to hold it for appreciation value or sell it, whether you want to use it for retirement and amortize out over a longer term or use it for the cash flow generated from it, or whether you want to pay it off as quickly as possible. A good investment property specialist will help you make sure your refinancing decisions are in line with your investment objectives.
How can working with an investment property specialist benefit the first-time investor?
Generally, all lenders look for the same performance baseline, in terms of debt service coverage on a single performing property. If there’s a problem, it will usually be because the estimated income from the property appears too low or the expenses appear too high. More experienced lenders who are familiar with investment property issues will also look at what happens if utility costs rise or if vacancy rates rise or if there are other variables that need to be taken into consideration. So it’s to your advantage to let them run the numbers. Obviously, the objective is to see whether it appears that the property will cash flow to its potential. This can also help you test your assumptions, verify that you were given good, accurate info from the previous owner, confirm that you are looking at the numbers the way you should and help you determine if your investment makes as much sense as you think.
Just as important as looking at how the property is expected to perform, you’re going to want a lender who will take the time to look at your situation as an individual borrower to get the total view. This may be critical if special loan terms or conditions become necessary.
BRAD J. PASCARELLA is a commercial loan officer at Brentwood Bank. Reach him at firstname.lastname@example.org or (412) 409-9100, x239.