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Commercial properties come in all shapes, sizes and prices. It is therefore very important that you work with a broker that can help you determine which of the many properties is best for you. (See last week’s column about how to choose a broker). As I started to outline this column I soon realized that there is just too much information to cover in one blog. So, I will publish next Monday and every four or five days from there on to try to cover this subject.
I am assuming that you intend to purchase a commercial property for income. That is why commercial properties are so attractive to individual investors. Most commercial properties that are appropriate for individual investors will have leases that provide enough income to cover the expenses and then some.Before you make an offer on a property, you first need to complete a needs based analysis based upon how much money you have to invest in a commercial property, how much income you have to cover the shortfalls of the property, and what kind of property it is that you want. We will assume that your broker will help you with market prices and so forth, so I won’t try to cover how to price a building in your area.
First, most banks will lend 60% - 70% on commercial buildings. So, if you have $400,000, you can receive bank financing of $600,000 for a total price of $1,000,000. Likewise, $800,000 of investment capital buys a $2,000,000 building. This assumes you have a building that is generating 7.5% of income based upon the purchase price. (This is a “cap rate”, but more on that next column.)Second, although most banks will expect the rents from your commercial property to cover all the expenses (mortgage, tax and so forth), they will still look to the property owner to back up the mortgage if the rents fail to cover the monthly expenses. If you don’t have significant income, sometimes banks will look to other assets to cross collateralize the property. Cash, retirement accounts and other real property will all count. Again, consult with your broker for market intelligence on how local banks are viewing comparable deals in your area.
Finally, which of all the commercial proprieties to buy? There are three major different categories of income generating commercial property, multi family (apartments or similar), office and retail. Which one you buy is largely a matter of taste and how much time you want to spend maintaining the property. As a general rule, multi-family and retail will take more maintenance than office, but that is not always the case. There are good property managers that can take care of the details on all these categories so that you just collect a check every month. So do your homework on the property manager before you hire him or her.Next column: What the heck is a “Cap Rate?”
Great post, I found it to be very informative, I will definitely be back to check out your future posts on this subject!
Posted by: Louisville Real Estate | June 1, 2007 2:45 PM | Permalink to Comment