Leveraging Commercial Property Investment – Mezzanine Financing

Investing in property is a common way people secure their hard-earned money in a profitable way. Along with having their earnings saved, they also have the opportunity to earn more on it when property rates rise. This is why some investors choose to purchase or put money in commercial property.

But due to the perceived high-risk nature of commercial property, many are skeptical of investing in it when compared to investing in residential projects. The reality is far from this as commercial properties offer significant cash flow benefits, fewer ongoing expenses and a better rent certainty in the longer run.

Leveraging Commercial Property Investment – Mezzanine Financing

If you want to take advantage of these benefits and invest in commercial properties, there are several ways you can secure financing to begin the process. The main thing to understand here is how to leverage your investment and raise debt in a way that your risk is managed practically.

Leveraging is basically the amount of debt borrowed from lenders for a project to strategically increase wealth and improve cash flow. You can receive positive leverage when the cost of the loan is less than the return the commercial property makes. This way the investor adds to their wealth from the debt, making a profit on the overall project specifically when the property appreciates.

To gain this positive leverage the investor needs a well-placed capital at a fixed rate with long –payment terms and equal monthly payments. While these terms might not always be offered, there are several public and private lenders who will agree to negotiations.

But when you are able to receive capital that amortizes at these terms, you will have time to pay off the loan while earning from the property. Your loan and interest will be paid off from these earnings, also maximizing your returns on investment.

While receiving a loan from a bank is the most traditional way to leverage debt, it only covers a part of the total debt you require. Another way investors leverage their investment is by obtaining the ‘middle slice’ of the debt through mezzanine investment. If you don’t know what mezzanine debt financing is, here is a brief explanation:

Mezzanine Debt Financing

Mezzanine debt financing involves an investor receiving additional fixed-rate capital on top of their already secured mortgage to increase the total amount of investment for a commercial property or any other project. Another factor about mezzanine financing is that it is subordinated debt, meaning that the lender agrees to be paid as second priority to the bank.

Companies and investors seek this source of financing to leverage their returns while still raising debt from non-bank lenders through financing agencies such as Stamford Capital. They receive the first part of the investment as a mortgage from a bank, put a portion of money from their own pocket for buyout and receive the other part from mezzanine sourcing. This also helps an investor diversify their equity over multiple projects.

By leveraging your property in the beginning, you ensure that you make a profit on your investment and have the opportunity to work on other projects.

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