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 [email protected] or (412) 409-9100, x239.