OT - buying commercial property ??

17 years ago

(can't find a commercial property forum so plz bear with me...)

Is there any do & don't when buying commerical property?

Somewhat familar with residential as I have moved & brought twice already.

I don't recall seeing much ads for commericial real estate agent as opposed to residential's.

Def. would get a lawyer soon. But some general questions are liked do I have a "back out clause in inspection? and what about getting comps if no agents are involved?

An on-line site to a "Dummy in Commercial Property" site/forum would be appreciated.

Sort by:Oldest

Comments (7)

triciae
17 years ago
Hi & Welcome to the Forum...

"Commercial" real estate is a very broad topic. It covers everything from a simple duplex you intend to rent out to large, multi-anchor shopping complexes or the Empire State Building.

They are handled differently. It would help if you could be a bit more specific in what you're looking to purchase?

As just general statements:

1. Large real estate brokers have commercial divisions (Century 21, Prudential, Re/max, etc.). Residential agents do not sell much commercial property except for small residential rentals.
2. A lot of commercial real estate is sold as an "operating concern" (Part of the purchase of a business, for example).
3. Major metro area newspapers have a few commercial properties in the real estate section.
4. A broker is a good idea because you will need to deal with zoning and other governmental agencies.
5. Financing is also different. If you intend to finance the property, you'll need a commercial loan officer. At large banks, these guys usually have their own private offices & receive commissions in addition to their base salary. They are higher up the food chain than residential loan originators/officers. (I hate to admit it but many often act the part too. rofl) There are also commercial loan brokers. They also get a commission.
6. Attorneys are always involved in commercial real estate transactions. But, usually not until you've decided on a property. Commercial loan documents are not like residential. Residential loan docs are standardized. Commercial docs are individualized. You'll have things like Loan Agreements and, probably, UCC filings in addition to the Promissory Note & Mortgage/Deed of Trust. The attorney for the lender draws up the docs & your attorney will review & explain them to you. Your counsel will also attend the closing.

Properties I can suggest you be cautious with are drycleaning establishments, any type of auto repair facility, restaurants, and two-story "strip" centers.

I don't know of a "Commercial Real Estate for Dummies" book or web site, unfortunately. Anyway, it would help to know what type property you're looking for.

Tricia
ravlegend
Original Author
17 years ago
thx for some of the suggestions,triciae.

Basic info:
130 year old 4 stories townhouse asking for approx. 800K in a historic neighborhood.
6 -1 bedroom apartments (4 rented out at $600 each)
2 retail spaces -long term lease totaling about $4k/month

If I do nothing but some basic building improvement, their basic number is showing a positive cashflow of $9k a year when FULLY leased out.
IMO may not worth the trouble since I may have to hire a building manager & who knows what's in store in an old building.

The only positive I see is just sit & hold onto a building/property in a upswing neighborhood.
Am I missing something?
Related Discussions
OT (sort of) What exactly is DirectBuy?
Q
Comments (12)
They are also *quite* persistent in trying to get you to sign up. As someone else mentioned, it's a hard-sell, time-share condo type of deal. My mom saw the commercial and made an appointment for me (before she told me <: and initially i was open to checking it out. then did a web search read up on the dissatisfied customer postings recall consumer reports bit more wary. talk their salespeople few times mention that they are persistent called me repeatedly try get come for an appointment even after canceled.>They won't tell you what their membership fee IS, and it varies by individual showroom and area of the country. I tried to get at least a rough, ballpark figure out of them, which took several requests, but they finally said it might range from *a few hundred* up to $3000 (online reports say $7000 or so). In all fairness, it depends on how long you agree to pay for the membership -- I think they have one-month, three-month, and year-long memberships. They won't tell you what brands they carry before you go to the appointment either. It was about an hour's drive for me and gas was still pretty high, so I tried to find out as much as possible before going to the appointment -- which I ended up canceling. I'm *not* sure (can anyone else verify this?) if they will tell you before you pay, I presume they will. But if they don't have the brand of cabinets or whatever items that you want, you're out of luck. And no doubt, once you've paid for the membership, you're probably going to feel that much more obligated to go with whatever brands/styles that they're offering, since you'll want to get your money's worth out of the membership. Oh, and one other sales tactic -- they insist that you *must* sign up AT THE APPOINTMENT or you are not *eligible* (eyes rolling) to sign up later. I much prefer to be able to go home and think about a purchase rather than making one on the spot, even for much less expensive items. For an obligation of several thousand dollars? Nope, really NOT likely to decide in favor of THAT without thinking it over first, well away from the sales location and sales pressure. It's quite possible that they simply use that stipulation as another pressure tactic and will be quite happy to take your money if you call up a few days later and tell them that you've changed your mind, I don't know, but, it leaves a seriously bad taste in my mouth that they go to those extremes to begin with. Personally, while I did not go to their presentation, the hard-sell tactics turned me off before I even got there. If they have such great products and it's such a wonderful deal for their customers, why would they *need* such blatant pressure tactics?
...See More
Need advice on buying an Income Property (newbie)
Q
Comments (7)
Hi Loralee, There are worthy realtors who'll be around soon, so I'll leave the agent questions to them. In the meanwhile, as an investments lender as well as an income real estate portfolio owner myself, I'll cover the top 3 questions; - Is it a good idea to incorporate a business for this activity to protect our personal assets in the event of any kind of tenant lawsuit? It depends. There are costs to create and maintain a corporation, and its prudent to weigh out & compare these costs versus alternative protective means. For a first-time investor (especially if your vulnerable net worth is still modest,) a good umbrella insurance policy will often suffice just fine. Insurance does also have its limitations though (including not addressing tax planning or cashflow management and defense...) so as you grow your vulnerable net worth, the incremental costs of a business entity (corporations, trusts, limited partnerships, and the like) begin making more and more sense. - If we subbed the management service to a professional management service, generally what kind of fee would we be looking at? For individual single family home rentals, management fees are generally; A) 1st month's rent from the new tenant, plus, B) 10% of the ongoing gross rental revenues. Usually this will get you the services of; Marketing & screening for new tenants, Collection, bookkeeping, and deposits to your account of monthly rents, Periodic maintenance inspections, Notification to you of physically viewable problems, late payments, defaults, Management of service providers for repairs, or cleaning/turnovers between tenants. (Of course, more or less may be offered in competitive environments.) - What kind of rental profit % should there be after mortgage, taxes, insurance, repairs. (I would like to know so I can compare current rentals in the area to see if we could offer comparable in order to know if this is feasible.) What kind of profit SHOULD there be??? Sweetheart, the answer is always; "AS MUCH AS YOU CAN POSSIBLY COLLECT!!!!" ;~) In reality, in most North American real estate markets, the rental revenue markets have not increased enough in the past 10-15 years to keep up with the crazy property appreciation prices that were driven by the easy credit available. The collapse of the credit markets has BEGUN to reverse this (with property flat to dropping, but rents beginning to awaken & grow again,) however its still going to take a while to really make sense on an easy basis. Most single family homes "bought at retail" cannot be fully supported by the local rental rates available, and most landlords of such homes need to accumulate a significant amount of equity in the home (or said inversely; need to reduce the loan balance to reduce the interest costs) enough so that the net real rental revenues are more than the out of pocket cash costs of ownership (i.e. "positive cashflows.") Prudent investors, however, donot consider a property TRULY cashflow positive unless its rental revenues are more than not just the interest paid for the loans... but ALSO the interest NOT EARNED (or lost) from the cash value of the equity that is trapped in the real estate itself (since, if that real estate were sold, the equity value could be earning interest elsewhere... and thus is a real cost, albeit merely 'on the books.') GENERALLY SPEAKING; anytime you can acquire a rental property in a market where the rents are climbing, and you can hope to have real rental revenues grow to be more than your total real costs of ownerhip (including equity value opportunity loss) within 2-3 years... you are doing very well. Hope this is helpful. Dave Donhoff Leverage Planner
...See More
Please explain property taxes after buying...
Q
Comments (15)
Two factors make up my tax bill: 1) the assessed value, 2) the year's tax rate for each taxing body (county, town, schools, library, whatever). If residential is the only base, the rate will be higher than if commercial properties carry some of the load. In my county they assess annually. This is a superior way to finance government because it reflects current values. We have lived in Cook Co. which assesses a third of the county each year because it is so large. Our assessments are made on a township level, based on a valuation of all similar properties within a neighborhood(size, exterior construction material, etc. and land value). When a house sells, that price goes into the mix, lifting median assessments for the whole neighborhood. (I am not thrilled by the teardowns happening around me -- small ranches on large lots being replaced by BIG homes mean higher assessment on my house.) The only disadvantge I see to you as a buyer would be if you wanted to protest your assessment. How could you justify a complaint if you've just paid more than the assessed valuation? I always protested our assessment in Cook Co. because there were properties nearly identical to mine that were under-assessed; they had to reduce mine.
...See More
Need help dealing w/ REA's/Property Managers on leases - kinda ot
Q
Comments (10)
After selling our home last year, we returned to the Northern Virginia area and decided to rent for a while. We are now in our second rental house. Price negotiability really depends on your market. In my area, house rents are all over the map. There is definitely room to negotiate but it takes work and patience. Take the advice of the prior posters. But be prepared for rejection. If your new area experienced a big run-up during the boom or was an area with a lot of investment properties, many owners are trying to cover their mortgages. Makes sense. However, it's unrealistic for many owners to cover their mortgages and other costs if the area saw rapid price inflation w/o commensurate increases in income. Rent is very sensitive to income and I've watched many houses sit on the rental market because they're overpriced. It's very hard for owner/investors to accept that they make get only 60-70% of their costs covered. I've negotiated the rents down by several hundred dollars/month on each of my houses. I've also been approached by owners I had talked to during my search who are now ready to meet my price...housing markets are a bit wacky now even if you're just interested in renting. The good news is that you're looking at the worst possible time for landlords w/o tenants. It's late fall/coming up on winter and most families have moved in and settled down until the spring/summer relocation season kicks in. You're in an excellent negotiating position. Be fair and you may find a landlord that will appreciate it. Also, please don't forget that a good rental agreement isn't just about price. The terms of your lease are equally important. My first landlords failed to sell their home so they rented it BUT wanted to keep it on the market with a lockbox for the entire term of the lease. Needless to say we walked. They came back hanging their heads and we negotiated a much better arrangement for us. Now, this will sound strange but I considered it pretty important. If renting from a private owner w/o the involvement of a property management company, run a credit check on the landlords. There are a lot of homeowners out there teetering on the brink and you don't want a foreclosure/eviction notice after you've gone to the expense and trouble of moving in. The real estate agent should be able to help you. There are owner/landlords who will try and intimidate you because you're a lowly renter. Don't fall for it. Stay your best assertive homeowning self and don't settle for less than you need. It pays to know average rents for various types of housing in your market. I had a real estate agent helping me with the first house. She was great. She found places for me to see, called owners with home for sale to see if they might be interested in renting, she had the rental statistics, and she was invaluable in negotiating a lease. There are a lot of accidental landlords in the market right now and they range from decent to just awful. Having a real estate professional helping you with the details of the lease can save you money and enhance your living experience. The agent did not pressure us to buy. She earns a small leasing commission from the landlord and also earns a potential future buyer...you. We sent our agent a giant gourmet basket of goodies as a thank you and she was thrilled. I could write a book on the subject of transitioning from homeowner to renter and will be happy to answer any questions you may have down the line. One more piece of advice. Before you begin looking, study the landlord/tenant law in your new area. Most states/counties now have online handbooks and it's best to know your rights and responsibilities upfront.
...See More
kaismom
17 years ago
Ravlegend,

Typically there is a formula for cash flow for a commercial building which sets the price of a building.

Where we live, because of the fierce competetion chasing the properties, there are NO properties to be had that actually has a reasonable cash flow for under $2 mil where a small time invester can get in. Many people I know that have been in commercial real estate for a long time is sitting and waiting until the prices stabilize.

Did you consider tax and maintenance in the cash flow which can be quite a bit?
Commercial property loans are typically much less than 30 years. I am not sure how you are coming up with the cash flow numbers....
triciae
17 years ago
Are you missing something? Well, I can't answer that because there's still not enough info...but, getting closer.

Tax shelter "may" be a reason to hold such a building. However, consider that a 19th century building may choke you in the short term before you can benefit from the long term.

Have you been realistic in calculating your maintenance expenses? Also, what about insurance & property taxes? How much deferred maintenance is there with the property? What are you considering "long term" on the retail leases? What type of businesses are they? Quality of residential tenants? If the units are renting for $600/mo., I'm making an assumption here that this is not the high-rent district? What is the turnover rate? How long to release? Are you allowing for cleaning, paint, carpet, possibly appliances with each turnover?

You've said that your initial estimate is for $9K in positive cash flow. I'll be frank & say that $9K doesn't sound like any where near enough to cover maintenance costs on a building that's over 100 years old. How old are the building's fixtures (furnace, a/c, plumbing, electrical, etc.)? Be sure to allow for replacement in your costs.

Since you've got a building in mind...I'd suggest you take what numbers you have & make an appointment with a commercial loan officer at the bank you do business with. He/she will be able to quickly determine if you're in the ball park for your area. They can also give you some basic financing info. Expect loan terms of 10-15 years with a balloon.

Is there a realtor involved? If so, they should have an operating budget for you to look at.

Tricia
brickeyee
17 years ago
One of the best ways to get started is as a junior partner with a more experienced investor.
You will need cash.
dreamgarden
17 years ago
This might be useful: www.realestateyip.com

REAL ESTATE TREASURE CHEST TABLE OF CONTENTS

Chapter & Title

1.ÃHOW IT STARTEDÃÃÃ

2.ÃFIRST BUYSÃÃÃ

3.ÃFIRST BONERSÃÃÃ

4.ÃLEARNING THE FACTS OF LIFEÃÃÃ

5.ÃDUMPING THEÃLOSERSÃÃÃ

6.ÃWHAT IS THE BEST BUY IN REAL ESTATE AND WHYÃÃÃ

7.ÃWHAT TO CHECK FIRSTÃÃÃ

8.ÃWHAT TO CHECK SECONDÃÃÃ

9.ÃWHY WE PREFER UNHEATED PROPERTIESÃÃÃÃ

10.ÃTHE TIME IS NOWÃÃÃ

11.ÃARE THERE STILL GOOD BUYS?ÃÃÃ

12.ÃHow TO FIND THE GOOD BUYSÃÃÃ

13.ÃTHE IMPORTANCE AND USES OF THE VALUE FORMULAÃÃ

14.ÃTYPES TO WHICH THE VALUE FORMULA CAN BEAPPLIEDÃÃ

15.ÃFIGURING THE NETÃÃÃ

16.ÃBEFORE THE OFFERÃÃÃ

17.ÃFRAMING THE OFFERÃÃÃ

18.ÃTHE OFFERÃÃÃ

19.ÃAFTER ACCEPTANCEÃÃÃ

20.ÃAFTER TAKING TITLEÃÃÃ .

21.ÃSTRAIGHTENING OUT TENANCIESÃÃÃ

22.ÃNEW TENANTSÃÃÃ

23.ÃHow TO HOLD THE PROPERTYÃÃÃ

24.ÃTAX BENEFITS WHILE HOLDINGÃÃÃ

25.ÃHow TO SELL THEMÃÃÃ

26.ÃTAX ANGLES IN SELLING
coolvt
17 years ago
I would suggest that if you want to get your feet wet in the business, that you consider starting with a duplex. That way you can only get hurt to the tune of $200-$300,000 rather than $800,000.
The the building you are considering, the adice has been right on the money. You should probably figure a 5% vacancy rate, 6-7% repairs and 2% reserves (savings for large replacements like furnaces, roofs, etc). If you have to hire an experienced manager they will want 5%-7% of the gross rents. I guess you can see that you could easily go in the hole on this building. I think trying somehting with a partner is a possibility. I would also suggest joining an investors' group and reading anything you can get your hands on concerning RE investing.

OT - buying commercial property ??

Comments (7)

triciae

ravlegend
Original Author

Related Discussions

kaismom

triciae

brickeyee

dreamgarden

coolvt

COMPANY

BUSINESS SERVICES

GET HELP

CONNECT WITH US

OT - buying commercial property ??

Comments (7)

triciae

ravlegendOriginal Author

Related Discussions

kaismom

triciae

brickeyee

dreamgarden

coolvt

COMPANY

BUSINESS SERVICES

GET HELP

CONNECT WITH US

ravlegend
Original Author