Investment Clubs - How To Start An Investment Club - Real Estate Investment Club

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There comes a time in every business owners life when it makes sense to purchase a building to operate out of. Most of the time its when they have outgrown a leased facility and realize that a building might be a wise investment for the company. As much of a milestone as this is, it can also be a stressful time for a company as there are so many options available and so many different things to learn in a short period of time. Most likely its the the largest facet of small business finance that their company will face.

Most likely, you will need a loan to make this possible. If you are going to occupy more than 50% of the building, banks consider this owner occupied and want you to put in 20% of the purchase price. If you need to put less down, then you can get creative by either offering up additional collateral, such as your home or other business assets. Another good route is an SBA 504 loan program which allows you to put down 10% as opposed to 20%. As with any government related program, this has higher feeds and more paperwork. The plus side is that its about the only place that you can get 20 year fixed rates, generally at much lower rates than a bank will offer.

The good thing about real estate loans, you can generally qualify for a lower rate than your run of the mill business startup loan. Since the loan will be secured by a piece of physical real estate, banks tend to be more aggressive with rates. Commercial loans differ from residential in that the rates are not locked for as long as residential loans. With a residential mortgage, banks sell those to secondary financing companies immediately after funding. With a commercial loan, they stay on the books so they are not as willing to offer a long term rate. What you will normally see is a five year fixed rate and a twenty year amortization, which simply means your rate is locked for only 5 years but your payment is as if you have a 20 year loan. As more and more banks enter the market, it has forced lending institutions to offer more flexible rates to its commercial clients. This includes fixed rates as long as 10 years and amortization as long as 25 years. This is good news for the borrower. Rates are typically based off of the corresponding treasury rate. Typically it's anywhere from 175 basis points to 300 basis points. For example, lets say you are seeking a 5 year loan/20 year amortization for your commercial building purchase. Most banks will price that off of the 5 year treasury, so if that rate is 5% then you could expect a rate from 6.75%-8.00%.

After you've had initial talks with the bank, you'll need to get prepared for loan approval. Most banks will seek 2-3 years of financial statements or tax returns on the company so they can get a history of whether the business can support the new debt payments. Also, they will likely require a personal guarantee and ask for personal tax returns and a personal financial statement from the owners of the company. As they are reviewing your financial statements, expect to be cross-sold on some of the bank's value-added services like payroll services, brokerage accounts, merchant accounts, or bank programs for the employees.

While the entire procedure may seem a little daunting, it is generally easy to do if you have your finances in order. When compared to other types of business loans, commercial mortgages rank on the easier side due to the strength of the collateral. With the building acting as collateral, most banks feel comfortable getting a little more aggressive since real estate tends to be a stable piece of collateral that holds is value well. If you do your homework and come prepared, it can be a very easy and pleasant experience for you and your company.