Hi,

I have 7 rental properties that have appreciated in value. Included my own primary residence, I have about $500k in equity. I am an Estimator for a commercial general contractor who builds a lot of retail. Im working on a project where the developer is building a small retail strip center, all said and done he will cash flow about $500k per year. I want to develop a project like this on my own and wanted to know if I could leverage, on paper, my personal property equity to use as a downpayment on purchasing a commercial property or even to buy land and build my own shopping center. I have heard you need about 20% down, which would be about $600k on a $3mil project. Will banks take an equity interest on paper in my personal property as down payment?

Not knowing where to start, do I talk to a bank, then find a commercial real estate broker to find me the land/property and pull together the details? What advice can you lend?

Melissa:

Concentrating solely on your questions.

” Will banks take an equity interest on paper in my personal property as down payment? “ Nope, banks will not accept that. The money has to be there. They are not going to take second position mortgages as your equity contribution.

” Not knowing where to start, do I talk to a bank? “ Hmmm not the best place to start since banks do not like to talk hypothetical. You need a plan and then you lineup the financing.

The process of financing a commercial real estate development is usually done in stages. The first one would be in the form of a land acquisition loan. It then becomes a development/construction loan. Twenty percent down payment is a little too optimistic, you will not get a bank to lend you 80% on land. The whole financing is a bit more complicated, and lenders avoid developers without experience.

The Catch-22 in business: you need the experience to get the "job", and you need the job to get the experience...

Dear Loan Universe,

If the baks won't accept an equity interest as downpayment, is it true that there are some banks that will give me 100% home equity loan? Im thinking I can get the cash out this way and then use it for the down payment towards a commercial property.

If I want to go commercial, where do I start? Should I be looking for a commercial real estate broker?

… is it true that there are some banks that will give me 100% home equity loan?

Yes, that is true as long as you qualify using your personal income as a source of repayment. It is also true that you could turn around and use this money as your down payment for a commercial property.

… If I want to go commercial, where do I start? Should I be looking for a commercial real estate broker?

I personally think that people should avoid construction projects unless they are general contractors or have extensive experience in construction. Too many things can go wrong. I would usually point people in the direction of income producing property, but you seem to have experience with that already since you mention “7 rental properties”.

If you are still thinking of doing a construction/development, In your position I would:

1- Start with a smaller project.
2- Go with something less risky such as multi-family instead of strip shopping center.

Going with a broker would be a good place to start as it does not cost anything to just look.

Good luck.

Admin Replied:

"I personally think that people should avoid construction projects unless they are general contractors or have extensive experience in construction. Too many things can go wrong"

I could not agree more. If you dont have the experience and moreover the connections, be aware that construction projects can get really hairy. I have seen people loose their house as a result of being swindled by one contractor and having another one place a mechanic's lien. The legal cost, insurance costs etc. Too many variables.

I also agree that you should start small. Use the home equity to put down 40-55% for a smaller, fully occupied retail center. Grab hold of a good real estate agent and an even better appraiser and start hunting. In a few years the combined equity and connections will give you the ability to do another small retail again to make up for the revenue you seek or go for your big project.

Site development is a speculative business, unless you minimize your risks to acceptable and feasable numbers. When you have a vision, capital, and a great business plan, you have the first few ingredients of a succesful venture. One of the most important components of that type of project is experience. If you have l the necessary components in whole or part, map out a plan, business plan with research of the project, marketing how you plan to sell the homes, a good exit strategy and personally you have a good financial outlook/stability with respect to tax planning for long term and short term goals, I would venture to say you have a good project if the numbers look good. If you don't risk anything you don't loose anything and you won't gain anything if you don't risk anything.