Why Financial Advisors Should Consider Investing In Their Own Real Estate

24 Aug

Why Financial Advisors Should Consider Investing In Their Own Real Estate

As the financial advisor sector has matured, more opportunities have developed for advisors to leverage capital to grow their businesses. In addition to capital for acquisitions and other growth initiatives, advisors also have access to capital for commercial real estate. The opportunities are even greater, now that advisors have access to SBA loans.

The 504 program is the primary mechanism for funding real estate with an SBA guaranty loan. The 504 program provides borrowers with many benefits, including favorable loan terms and a lower down payment. This program is also ideal for advisors whose bank or credit union is uncomfortable assuming all of the risk for a loan or who have not developed enough capital and credit history to secure a loan through traditional lenders. This is because the loan utilizes a Certified Development Company (CDC) that provides financing for 30% to 40% of the project. The CDC takes a second lien position on the property and this reduces risk and provides a benefit for the primary lender because it provides a 50% loan-to-value ratio. This makes it more appealing for lenders who otherwise would shy away from such deals. ​ The benefit for the borrower is the CDC’s portion of the loan is normally a 20 year or 25-year term with a fixed rate. The interest rate is based on the 10-year treasury rate and usually results in a very low interest rate. At the time of publishing the CDC’s rate is under 3%.

There are many reasons why advisors would want to own commercial real estate. First of all, it allows advisors to turn a rental expense into an appreciable asset. This builds the overall value of the business and provides the advisor with collateral that can be used to secure additional funding later on. Second, an advisor can lease a small percentage of the space and generate additional rental income for the business. Both the SBA and the lender have limitations on how much of the space can be rented, so it is important to check with an SBA lender before signing any real estate agreements. Third, as the owner of real estate, the advisor has full control of the space and can mold it to fit the needs of their growing practice without fear of landlord restrictions.

Commercial real estate is a sound investment for a growing financial advisor firm. If you would like to learn more about the SBA 504 program and opportunities for investing in commercial real estate, please schedule a free consultation call.

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