Are you looking for a legitimate way to invest in the real estate market, while avoiding uncompensated risks?

CMBS loans can help you achieve this objective. Commercial mortgage-backed securities are loans granted for income-producing commercial properties such as hotels, apartment buildings, retail centers, warehouses, factories and office buildings. While these investments involve the purchase of bonds, the bonds are backed by commercial real estate mortgages.

These mortgages typically come with a 10-year loan term, fixed interest rate, considerable balloon payment due at loan maturity and prepayment provisions that are favorable to investors. They require borrowers to use their own funds for about 30 to 40 percent of the property’s value, with the mortgage covering the remaining 60 to 70 percent.

As long as they are rated accurately and represented honestly, these loans pose a relatively low level of risk to buyers.

The Benefits

The most important takeaways are that CMBS loans make it easier for commercial borrows to gain access to funds, have better yield potential and offer diversification benefits.

Banks bundle these loans into series segmented according to rating and risk level. For example, the senior issue will receive principal and interest payments first. This range allows investors to select their preferred issue according to their desired yield and capacity for risk.

CMBS loans represent a convenient alternative to real estate investment trusts (REITS). CMBS offer several advantages over REITS including a guaranteed return rate. They also offer higher returns than corporate or government bonds and significantly lower prepayment risk than mortgage-backed securities.

How They Work

Investors receive payments generated by the interest received from the pooled loans on a monthly basis. Payment is rendered first to investors who hold the highest rated bonds and continues down the line, paying all accrued interest on the bonds for each rating.

If a shortfall in loan payments occurs, the lower rated bonds absorb the shock by incurring a principal loss first, providing protection for higher rated bonds. This system also works well in the event that a foreclosure on an underlying property causes an issue with meeting scheduled payments on all bond classes.

When reviewing CMBS loans, it is critical to analyze the individual loans available in the pool on a granular level, as many have unique features. Furthermore, CMBS issuances are generally well-diversified by property type and geography, with the average mortgage pool consisting of 50 to 75 loans and sometimes exceeding this number.

There are many advantages to investing in CMBS loans, and with the appropriate due diligence, you can reap the rewards of commercial real estate investment.