Home buyers tend to evaluate residential properties based on condition, location, and amenities. Mortgage lenders rely on a combination of property appraisals and comparisons with other similar homes in the area. Things are different in commercial real estate. Investors and lenders lean heavily on physical condition and cash flow. Both are viewed through the lens of stability.
A property’s classification as either stable or unstable directly influences the financing options a prospective investor could tap into. The two primary choices are traditional bank lending and hard money. This is critical for anyone new to real estate investing.
Utah hard money loans are a specialty at Salt Lake City’s Actium Lending. The distinction between stable and unstable properties perfectly illustrates why Actium does so well in such a highly competitive market.
Defining Stable and Unstable
Stability ultimately boils down to two things in the commercial real estate game: predictable income and operational readiness. Traditional lenders want to see a steady stream of income along with an owner capable of keeping occupancy high.
Stable Properties
Stable commercial properties are turnkey properties already generating a reliable amount of revenue. A good example would be a medical office building occupied primarily by long-term institutional tenants. Another would be a retail center with a strong reputation among tenants and consistently high occupancy rates. In both cases, the physical property requires no major structural work. Historical cash flows easily keep up with both debt obligations and operational costs.
Unstable Properties
Unstable commercial properties are usually properties in transition. Examples include commercial office buildings and retail centers that have lost their anchor tenants. In many cases, high vacancy has been a persistent problem. Owners do not have the financial resources to keep the properties up. So investing requires planning for extensive capital improvements and potential use changes. Both suggest a transitional period for the property.
Banks Hesitate With Unstable Properties
Traditional banks and credit unions are naturally risk averse. They need to be because they manage public consumer deposits. All deposits are subject to strict federal oversight, so underwriting models must provide a reasonable level of financial safety.
When a bank evaluates an unstable property, software flags things like a lack of immediate rental income. A half-vacant property or one that is in the traditional lease-out phase is not likely to have a strong enough Debt Service Coverage Ratio (DSCR) to satisfy a bank.
Banks also struggle with future market improvements and tenant repositioning. A temporary interruption in cash flow, no matter how minor, is automatically assumed to be a threat to loan safety. So if there is any reason to believe such conditions would occur, a loan application is likely to be rejected.
Why Hard Money Lenders Don’t
Actium says hard money lenders do not tend to struggle with unstable properties. Properties in transition are not broken; they are opportunities waiting to be seized. If Utah hard money loans can help an investor turn an opportunity into a nice profit, lenders will at least consider financing the project.
Hard money lenders place very little emphasis on borrower credit score and history. Instead, they are most interested in the tangible and intrinsic value of a borrower’s collateral. In the case of a real estate transaction, the property being acquired would be the collateral the lender looks at.
Hard money is also structured in a way that protects lenders. Loans are short term in nature, usually being carried for no more than 24 months. However, 6-12 months is the norm. Whether a property is stable or unstable at the time of acquisition, hard money gets the job done.
