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Pros and cons of commercial mortgages : |
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The main advantages of commercial mortgages are as
follows:
- Retain Ownership. Instead of raising funds
by selling an interest in the property or the business
to an investor, you retain complete ownership of both.
The lender is only entitled to an interest return on
its mortgage, not a percentage of ownership that an
investor would expect. Also he/she can only exercise
the right if you default. You retain all the benefits
of ownership in an asset that has the potential to appreciate
in value.
- Better Cash Flow. A mortgage gives you access
to capital with minimal up-front payments and the flexibility
to design a repayment schedule that suits your needs.
- Maximize Financial Leverage. Financing your
property purchase with a mortgage will allow you to
use your cash flow for other pressing needs.
- Simplified cash flow management. Mortgage
schedules are preset, making cash management more predictable.
- Tax advantage. Interest payments on your mortgage
are tax deductible and are made with pre-tax money.
Purchases financed with profits, in contrast, are,
made with after-tax money. The main disadvantages of
commercial mortgages are as follows:
- Collateral. The nature of a mortgage requires
you to pledge the purchased property to the lender.
If you default on the mortgage, the lender is able to
foreclose upon the property and sell it to repay the
money owed to the lender. Make sure that when the mortgage
is repaid, the lender is obligated to release its mortgage
and is required to make any government filings acknowledging
this release.
- Defaults. The lender may define a variety
of events that will constitute a default on the mortgage,
including failure to make any payment on time, bankruptcy,
insolvency and breaches of any obligations in the mortgage
documents. Try to negotiate advance written notice of
any alleged default, with a reasonable amount of time
to cure the default.
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