With the recent collapse of the U.S. sub-prime mortgage market, credit is increasingly difficult for consumers to come by. Lenders are reducing their exposure to high-risk ventures. Lingering uncertainty about the credit market as well as the stability of the international money market causes widespread reluctance to finance ventures.
Fortunately for investors seeking commercial real estate financing, the commercial sector is not directly affected by these developments. Although riskier ventures will still be more difficult to finance with credit, the current economic climate has not stalled lenders.
With the recent developments in both the U.S., and across the international credit market, debt is becoming a well known concept.
While economic uncertainty would demand that all investors be prudent about entering into debt, most Organization for Economic Co-operation and Development countries are not in recession. In fact, they have actually experienced record growth and prosperity over the past decade. This lends some robustness to the major western economies.
Most business expansion is financed using commercial loans, so provided debt is entered into for purposes of investment, building, and expansion of the business (rather than a fundamental cash-flow problem). Debt is not in itself a negative thing. It is the return on that debt that is the problem.
Commercial real estate financing can be secured to fund the purchase of land for infrastructure and services development. Power plants, streets, utilities, shopping complexes, office or apartment buildings, parking facilities, parks, resorts, and golf courses, and even medical clinics or private hospitals are just a few such real estate investments.
Frequently, commercial property loans are sought as a means of refinancing existing debt to increase the total value of the investment. It is possible for private investors and companies to make a career in the reiterative process of reinvestment. Financing the cost of expansion against the projected profits of the venture can be quite lucrative.
It is true that there is still some volatility and uncertainty about the stability of the western economies. Consequently, investors should be as vigilant as ever about entering into unprofitable arrangements. Such factors influencing profitability include cost blowouts, too little potential return, or inherently risky ventures.
Investment consultants have made a market for themselves in advising smaller scale investors on commercial real estate financing, and providing them with the means of determining which projects are worth entering into, based on the available information. This includes taking into account the possible blowouts, and considering what might go wrong with any given project.
By applying basic rules of thumb, and not investing beyond certain thresholds, investors can increase their chances of sticking to projects that are within their means.
With the use of specialized software, this process can be further streamlined, allowing financiers to quickly weed out which projects are potentially unprofitable. Based on the available data and taking into account uncertainties and potential threats to the project, financiers can make smarter lending decisions.
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