You’ve probably heard about the commercial real estate bubble, here’s the ugly truth that lenders and other insiders don’t want you to know. Despite all the hype, not every commercial property is in trouble. The key for you as an investor is to avoid certain pitfalls and learn from other investor’s mistakes.

Before the economic and credit boom that has led into the recent downturn, conventional lenders capped loan amounts at 65 percent of the value of the property. This means that your $10 million commercial property would qualify for a maximum loan of $6.5 million. The current problems with commercial property investments started when hedge funds and private equity lenders began offering much higher loan to value ratios, meaning they would lend against your investment property with as much as 80 percent of the value of the real estate.

Mistakes Made by Commercial Investors

Some investors decided to refinance their $10 million commercial property for $8 million and get $1.5 million out tax-free! What seemed like a great deal at the time has come back to ruin the typical commercial property investment. The problem was that these loans needed to be refinanced after five years. Owners who pulled money out of their investments like this began down a path that has led to the troubles we are seeing now. » Read more: Commercial Property Investment Mistakes and How to Avoid Them

We’re all hearing from brokers, real estate experts and gurus that now is the time to buy Commercial Real Estate. Asking prices have dropped 40%, 50%, 60% below loan amounts. “Buy now and make millions!” What we’re hearing is that they are counting on resurgence in equity again. Remember this same song in 2006?

How many Pro Forma’s do you see that take a building and show you how it will make this amount in year 1, this amount in year 2, and so on? I wish I had that crystal ball! This is just a theme from the bad old days when prices were being driven up with the same argument that equity will make the building worth more in the future. You should never buy Real estate based solely on equity growth – especially now.

If we are to learn from the past, let’s get some real investing savvy here. » Read more: How to Analyze a Commercial Property Investment Opportunity

UK commercial property has been rising since August 2009 after experiencing a two-year severe decline. This rise peaked last year in 2010, with UK commercial property making a 14.5 per cent total return. According to property research and index provider, Investment Property Databank (IPD) the strongest in four years and a sharp rise on the 2.2 per cent provided in 2009. Property has also been considered to be a good hedge against inflation, which is a good thing considering Consumer Price Index (CPI) inflation hit 3.7 per cent in December.

Income

Commercial property rental income fell far less severely than during its two-year plunge. In the UK the industry norm for rents tends to be upward, which can provide some security. When talking about total returns for property it tends to be less unstable than equities, although assets did not hold during the recent economic downturn. In more normal economic and market environments property owners are arguing that the differences should return.

Direct property funds can provide good diversification for a portfolio that is focused on equities and bonds, due to the pattern of returns. The equity market is picking up and is expected to outperform other assets, but it is predicted that commercial property will outperform gilts and bonds in the course of the next five years. » Read more: Why Commercial Property Is a Good Investment