By Andrew Lei
Commercial properties are a great addition to any investor’s portfolio. Investors buy commercial properties and lease them for monthly income. However, buying a commercial property requires skill, knowledge and diligence. Purchase commercial property by following six key steps:
Select a Property Type
First, determine why you wish to purchase a commercial property. Buy the appropriate property for 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 farm houses outside a city, consider buying land. Below are other commercial property types:
• Apartment buildings
• Retail buildings
• Mobile home parks
The second step is to arrange financing for your property. Commercial properties are relatively expensive compared to residential properties, so you should budget sufficient funds. Set aside reserves and find out the total loan amount you are preapproved for. Know the total capital outlay needed to close. Banks and individual lenders underwrite loans primarily based on a property’s Loan to Value (LTV) and debt coverage ratio (DCR) and secondarily to the borrower’s creditworthiness and experience. You will need to prepare a comprehensive loan package to “sell” the property and yourself to the loan officer.
Find a Commercial Agent
The third step is to find a commercial agent to assist in your property hunt. The commercial agent is a link between the seller and buyer. A veteran agent will likely have a “pocket” listing of properties available. The agent should listen to your requirements, make appropriate suggestions and help you avoid mistakes.
When your agent gives you a list of properties, be sure to cull a short list from it. Get the seller’s profit and loss statement, a statement of cash flow and rent rolls. After selecting a few properties that meet your criteria, submit letters of interest (LOIs) to your agent, who will forward them to the seller. Each LOI will spell out general terms like price, financing, due diligence period, good faith deposit amounts, etc.
Conduct Due Diligence
Once your offer is accepted by the seller, perform due diligence to ensure the profit and loss (P & L) and cash flow numbers are accurate. Verify income and expenses. Beware of any impending tenant vacancy, inflated “pro forma” figures, deferred maintenance, ambiguous or onerous contract clauses and local commercial property competition. Beware of the overall commercial property market cycle. Have a qualified commercial real estate lawyer review all contracts.
Manage The Manager
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 improving income generation. Either keep or replace the existing manager. In fact, preselect a manager long before you even close on the property. In this manner, you can have a near seamless ownership transition.
Tip – You do not want to be in the business of management. That’s what managers are for. Your job is to sit back and let the manager deal with the day to day operations. You need to step out of the picture and just collect checks. Better yet, find the next commercial property for your portfolio.
Summary of Steps
• Select a property type
• Arrange financing
• Find a commercial agent
• Make offers
• Conduct due diligence
• Manage the managers