The value of a commercial property is the current worth of the property, not what was paid for it or what a seller hopes it will be worth in 12 to 36 months. Equity is simply the difference between the current value and what you paid for the property. When you buy a property you can borrow 100% of the value and have no payment for as long as you keep that loan. You can refinance a loan to 100% of the value and get no payment for as long you don’t sell the property. If I were you, take the money and invest in more properties.
Let’s look at an example of how this works.
You buy a small restaurant from a person who wants to own a good restaurant. The purchase price is $1,000,000 and the deal would be a $100,000 cash purchase price less $200,000 in cash to close the sale. The seller has 18 months to lease the property at $300 a month for 24 years. If they agree, they sign a lease that would also cover the property taxes and insurance in a rental amount of $100 a month. Their attorney does the title search, preparation of the lease, and a fee to record property transfer. They also handle property taxes and insurance.
Your total purchase price is $900,000 and the seller’s payoff is $900,000. Your total investment is $900,000 plus your $100,000 down payment. The tenant covers the taxes, insurance, repairs, maintenance, and expenses up to $100 a month. Let’s use the same scenario but buy two small restaurants. You buy a $500,000 property with a $300,000 mortgage at 6.5% interest with a down payment of $25,000. Through the use of a lease agreement, you lease the property to the seller for $merged-approval and charge the tenant a monthly rent of $1,000. This rent amount would be $1,600. You then rent the property to other tenants at $1,000 a month. Over the term of the lease, you collect $5,600 for this one property. You may charge the tenants a lower monthly rent in exchange for the landlord covering the tax & insurance and taking care of all the maintenance and the property for you. The value of the property is $500,000. If you have a 20% down payment, you have now purchased a $400,000 commercial property with a mortgage balance of $350,000. If you lease and manage the property with a 20% down payment, you now own an $80,000 commercial property at a rate of $3,600 a year, which equates to a lease payment of $30,160 a month. The value of the property has increased from the beginning, notwithstanding the fact that you are not making any mortgage payments. As we discussed earlier, you can refinance the property after 10 years. Let’s assume that you have refinanced to $850,000 in year four. With the same $700,000 equity spread in two small restaurants, you have now leveraged an additional $1,700,000. This equity gain of 10% over the period of ownership will substantially increase your net worth.
Refinancing your commercial property with an equity loan allows you to access your equity for personal use. Remember, you can refinance your commercial property under normal leverage financing, whether you are a new entrepreneur or are looking to improve your current income stream.
I am a forcibly educated professional speaker. I specialize in real estate and small business. I have written twelve books and seven electronic books and 1000s of articles on personal finance, real estate, accounting, and investing. Through my thirteen years of experience, I have learned many ways to make money, both personally and in business. For more information, please visit my Web site athttp://www.ousendowmentwin.com.