The ABC’s of Commercial Property Locating

Are commercial properties your niche?

When deciding whether to invest in commercial property, you’ll need to ask yourself a few basic questions to see if it’s right for you.  While searching for any specific type of commercial investment, like residential property locating, you’ll want to know if the potential property acquisition is properly situated.  Is it close to other like, commercial properties, so you can be on the same footing when you try to attract tenants for the space?  This will be crucial as your location will impact what you can charge in rent.  Also, like residential, you’ll need to assess the overall property condition, including getting an expert inspection of the building to ascertain any hidden (or undetectable to you) defects.  In addition, what part or parts of the building will need to be upgraded – especially if there are any current building code violations on the building when you take it over.  Another key ingredient to keep in mind while doing your commercial property locating is to make sure you don’t intend to change the building to another use not currently provided for in the existing local municipality’s zoning code.

Research the property

It’s always an advantage to try to find out why the current seller wants to sell his commercial property.   Just how desperate are they to sell?  Are there are existing tax liens on the property?  Is the seller behind on their mortgage payments?  Are they in poor health, or need to move soon due to family issues?  And of course, is the current rent roll a true picture of the cash flow coming in on the property, and can it be improved? In addition, are the expenses the seller is providing you accurate?  All seller-provided numbers need to be researched and confirmed before you can make any accurate offers on the building. And anything you can research to help you get a better price on the property while in a negotiation will be helpful.

Studying the seller’s income statement

As you pour over all the data the seller provides you, ask yourself if the seller has been able to get maximum rents on his building.  Are there leases, and if so, are they well-written, covering you as the new owner in the event of tenant breaches of contract?  Does the income statement allow for proper vacancy rates, and therefore, a potential loss of income?  If the seller is using a management company for his property, are any management fees included in the income statement, and are they the norm of 10 to 15% of gross rents?  In addition, are the expenses realistic?  Make sure you check them with the seller’s current vendors to ensure accuracy.  Also, can you cut costs by using the services of more-affordable services, like less expensive plumbers and handymen?

Know your own temperament and goals

This is naturally, the most important decision you’ll have to make…even before you begin your search.  Do you feel comfortable dealing with tenants one on one?  Or would you rather have a property manager do the detail work for you?  Also, what are your financial goals?  Are you looking for equity appreciation, or is cash flow more important for the here and now?  Or, are you looking for more of a balance between the two?  Of course, you’ll also want to figure out how long you’re prepared to hold the asset…Will it be a short-term or long-term investment?  Once you’ve decided on these issues, you can then be better prepared to begin your search process.

 

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