With interest rates on the rise and a cycle of record low rates now in the rearview mirror, the commercial investment market is becoming harder to navigate, specifically for the small mom-and-pop investors and capital groups not backed by billions of dollars. As rates climb, the higher cost of getting into revenue-producing commercial assets has thrown a wrench into a lot of potential deals out there. With debt costs on the rise and the market coming off a hot streak of heavily increased property values, what are some ways local investors can still compete and find deals? Creative finance may be a tool to add to your tool belt.
How can a creative finance strategy, such as seller financing, be beneficial to both buyers and sellers in the environment we’re experiencing? For sellers, one of the hardest questions right now is: If I sell my property/portfolio, what am I going to buy? A very valid concern, especially for those that have held onto their commercial assets for the long haul. Sellers have seen significant appreciation and rent growth over the years, but if they let go of those assets now, they’re faced with doing a 1031 and buying another asset or coughing up the taxes. For someone who appreciates the income that their property provides (and has little to no debt on the asset as well), using a seller finance strategy allows them to maintain the cashflow from the property, not have to manage the asset anymore by switching to the role of the “bank”, and have great relief from the tax burdens of capital gains by creating a note instead of taking the entire profits of the deal upfront.
For buyers, being able to negotiate terms that are still favorable to the seller (but give the buyer more flexibility than they might get elsewhere) can potentially be the difference between making or breaking a deal. The buyer and the seller are able to collaborate directly, as a team, to come up with terms that work for the deal. They even have the freedom to think outside the box in order to be able to push a deal across the finish line. The buyer may be able to give the seller a higher purchase price that they were looking for, in exchange for a favorable interest rate to still allow the deal to cashflow for the investor. This can potentially unlock numerous deals for buyers and help sellers to not miss out on an otherwise unworkable deal. This allows sellers to be able to sell their property at the value they had sought after.
Of course, this is just one example, and these kinds of strategies have their place and time in the overall environment of commercial real estate. For those who know how to use these and have them in their toolbelt, creative finance can provide a sure level of value to this Northwest Arkansas market.
Collier & Associates
437 SW B St Bentonville, AR 72712