Commercial properties are a great addition to any investor’s portfolio. Investors buy commercial properties and rent them out for monthly income. However, buying commercial property requires skill, knowledge, and perseverance. Buy commercial property by following six main steps:
Select Property Type
First, determine why you want to buy a commercial property. Buy a property that fits your needs. For example, if you need a business headquarters, consider an office building within city limits for proximity to employees, suppliers, and customers. If you need to own a farmhouse outside the city, consider buying land. Below are other types of commercial property:
• Apartment building
• Retail buildings
• Mobile home park
The second step is to arrange financing for your property. Commercial properties are relatively expensive compared to residential properties, so you should budget fairly. Set aside a reserve and find out the total amount of the loan you agreed to in advance. Know the total capital outlay required to cover. Banks and individual lenders cover loans primarily based on the property’s Loan to Value (LTV) and debt coverage ratio (DCR) and secondly based on the borrower’s eligibility and experience. You will need to prepare a comprehensive loan package to “sell” your property and yourself to loan officers.
Find a Commercial Agent
The third step is to find a commercial agent to help with your property hunt. Commercial agents are liaisons between sellers and buyers. Veterans agents will likely have a list of “pocket” properties available. The agent should listen to your needs, make the right suggestions and help you avoid mistakes.
Make an Offer
When your agent gives you a list of properties, be sure to take a short list from him. Get seller income statements, cash flow statements, and rental rolls. After selecting several properties that meet your criteria, send a letter of interest (LOI) to your agent, who will forward it to the seller. Each LOI will outline general terms such as price, financing, due diligence period, amount of good faith deposit, etc.
Do Due Diligence
Once your offer is accepted by the seller, do your due diligence to make sure the profit and loss (P&L) and cash flow figures are accurate. Verify income and expenses. Be on the lookout for upcoming tenant vacancies, rising “pro forma” numbers, deferred maintenance, ambiguous or burdensome contract clauses, and local commercial property competition. Be aware of the cycle of the commercial property market as a whole. Ask a qualified commercial real estate attorney to review all contracts.
After you close escrow, be sure to manage your manager or management team. A great manager will keep an eye on expenses while maintaining or increasing revenue. Keep or replace existing managers. In fact, choose a manager long before you close the property. This way, you can have an almost seamless ownership transition.
Tip – You don’t want to be in the management business. That’s what managers are for. Your job is to sit back and let the manager handle the day-to-day operations. You have to get out of the picture and just collect the checks. Better yet, find the next commercial property for your portfolio.