Why Invest in Commercial Properties Instead of Single Family Homes?

While there are many people who seem to believe that investing in residential real estate and single-family homes is the way to go, investing in commercial properties is much better. Instead of focusing your real estate investing on residential properties focusing on commercial properties is a better option for a variety of reasons.

First of all, when it comes to investing in commercial properties, you will not have to worry about personally qualifying for a loan. The property itself qualifies for the loan. You usually will not have to worry about personally guaranteeing the loans when it comes to investing in commercial properties. Non-recourse financing is the type of financing most often used for commercial real estate investing. If your loan is foreclosed on, the bank will take the property, but they can’t come after you personally. Also, it will never affect your personal credit score.

You will also have the opportunity to deal with professional tenants when it comes to investing in commercial properties, instead of dealing with the tenants that come with residential properties, which is a huge benefit.

Another reason to invest in commercial real estate is to maximize your potential for profit on any one deal. You would have to invest in a lot of single-family homes to generate the kind of profit you can make on one commercial real estate investment.

So, with the proper education and training, it can be the right move to break into the field of commercial real estate investing.

How Much Money Will You Need?

Before you start purchasing commercial properties, it is important that you know how much money you are going to need to get started. Even though you will be able to get financing for your properties there are still going to be some fees that you are going to have to pay for on your own. So, how much money should you have available? Well, for the pre-closing and closing costs you are going to have to pay, you should have about 3-5% of the amount of the loan available, as well as 10-20% of the purchase price for the down payment. While you may not need that much money, it is best to plan on this amount just in case.

Where to Get the Money

Once you know how much money you will need, you are probably wondering where you can actually get the money. There are a variety of different places that you can get the money you will need. Commercial mortgage brokers are one choice. There are also some private lenders that may be able to provide you with the money that you need, so be sure to consider all of your options.

Using the Money

When you actually are ready to get the loan for your commercial property you will probably have to explain to your lender what you are going to use the money for. This means that you’ll need to be able to communicate to the lender what you are going to do with the money. There are several things that you may have to do with the money. You may need to use the money to acquire or purchase the property, and in this case, the lender will probably be able to loan you about 80-90% of the money you will need. In some cases you may need to use the money for a refinance of a property and the same amount will probably be available to you for refinancing as well. You may also need to have the money for construction of the property, including renovations, rehabilitations, and building that occurs on the property.

Keeping Yourself Protected

When you decide to invest in commercial properties, it is important that you keep yourself legally protected. Many people sue over a variety of things in today’s world, which means you’ll need to have plenty of protection. Be sure that you never own the properties in your own name, or you could be sued personally. You need to have a LLC or a corporation. This way, any lawsuit would be directed at your company and not at you personally.

A Good Team is Important

If you are going to get involved in commercial real estate investing, it is important that you have a good team to work with you. You should begin to form a good team immediately. You can ask for some recommendations from other people who invest in commercial real estate so that you are sure to get good people for your team. Some of the people that you will need to have on your team include a good commercial mortgage broker, a real estate attorney, a real estate accountant, a good insurance agent, a realtor that specializes in commercial real estate, and a company that works in property management.

Finding the Right Properties

One of the most important things when you are involved in commercial real estate is going to be finding the right properties to invest in. The following are several ways that you can find some great commercial properties to invest in.

– Commercial Realtors – One of the best ways to find good commercial properties to invest in is by using commercial realtors. Good realtors who specialize in commercial real estate can help you find the properties you need and they can also help you do your due diligence as well. If you are going to pick an agent, consider interviewing several agents to make sure that you find one that you can work well with. You can get online and go to the National Association of Realtors to find a good realtor or you can get some recommendations from other commercial real estate investors that you know.

– Internet – Another place that you can look for great commercial properties to invest in is on the Internet. There are a variety of different websites that can help you find the properties you are looking for. You will find both paid and free sites; however, for serious investors, going with the pay sites may be the most beneficial for you.

– Networking – Many investors overlook networking when it comes to finding good properties to invest in. There are a variety of networks and investment groups that can help you find great properties. Try getting involved in Chamber of Commerce meetings or get involved in some associations that will help you find the properties you want.

Consider the benefits; getting a non-recourse loan, dealing with professional tenants and the opportunity for much greater profits on any one deal. When you think about it, it is a smart move to choose investing in commercial real estate rather than investing in single-family homes.

Commercial Property Condition Assessment (PCA)

The purpose of all Commercial Property Condition Assessments (PCAs), ASTM standard E2018, is to make sure that the property and building you believe you are purchasing or leasing is actually the property being received. You will have reached that decision, in part, from the information attained via a professional inspection and Property Condition Report (PCR). Every real estate transaction is different and each transaction has its own unique set of considerations and conditions to validate before finalized. The utilization of professional third party experts in the physical property due diligence process is critical to the overall accuracy and cost efficiency of your property transaction.

The Purchase or Leasing of Commercial real estate, whether it be a basic commercial net lease, a commercial triple net lease, the purchase of a church facility, a retail outlet, or the purchase of a million square foot office/warehouse, the prospective buyer or lessee absolutely must conduct an adequate level of due diligence when investigating the physical quality of the commercial real estate they are investing in.

You need to know not only the physical characteristics of the real estate and buildings being acquired, but the approximate condition and age, to assess the good with the bad, such that you can adequately balance the risks and rewards being offered in conjunction with your real estate deal. The single most important part of the real estate transaction process, aside from the purchase price and profitability balance, is a well-documented review of the actual physical condition of the real property. Otherwise, you could find yourself the not so proud owner of a commercial property that, doesn’t suit your needs, costs more than you can afford in upkeep, or the ultimate remorse for investors – capital expenditures are being sunk into a property on a regular basis that someone else is utilizing and making money off of, and you are not. Suddenly, that long term lease with a solid anchor doesn’t seem so attractive anymore.

The process of commercial real estate inspection begins before the offer to purchase real estate is drafted or signed, by visiting the site and discussing the physical condition of the property with the Owner and real estate brokers. This process should be considered invaluable to establishing relationships required to obtain the information that will be necessary to concrete your due diligence with a Commercial Property Condition Assessment (PCA).

During negotiations and drafting of the real estate sales/lease contract it is important to recognize seller or lessor reluctance to points such as the existence and availability of important documents such as warranties, maintenance contracts, architectural and engineering plans and/or local municipality reviews and inspections. Negative reaction to the request for release of these documents by seller or lessor can imply possible deferred maintenance and/or inattention related to property and building condition(s) and inspection issues.

Once the commercial real estate sales contract is signed the due diligence period begins, focus on maximizing efficiency of time and cost and prioritizing concerns to start checking off the costly big ticket items from the top down. Assuming adequate documentation is furnished by the seller for review, adequate time should be allotted to verify the information provided. Additional effort and monies that that will need to be spent to make up a shortcoming of available documentation through extra property condition assessment and additional field inspections and/or experts should be considered essential and figured into the cost of the property transaction. Ask the seller for all documents and contacts the seller received during his due diligence process when he purchased the property to speed up fact finding.

Review of existing property documents where available may include:

Accessibility surveys, Architectural Building plans, Certificates of Occupancy, Citations from Authorities Having Jurisdiction, Emergency evacuation plans, Environmental studies, Electrical System Construction plans, Fire-detection test and maintenance records, Fire-door inspection reports, Fire-Protection System Construction plans, Fire and Restoration records, Maintenance records, Mechanical System, Construction plans, Violation Notices from Authorities Having Jurisdiction, Construction Permits, Plumbing System Construction plans, Previous inspection reports, Roofing System Construction plans and Warranties, Safety inspection records, Seller condition disclosures, Sprinkler System Test Records, Systems and Material Warranties, Current tenant information, Current policy of title insurance, Notices of any environmental conditions, Notices of any new or special assessments or taxes, Copies of all current bills for the property, Service contracts, Evidence of current zoning, As-built plans and specifications, All construction related documents including warranties, All past and present uses of the property, Third party reports or inspections, Any surveys of the land and improvements in seller’s possession.

One of the best tools available to the commercial property due diligence team is the interview process which can unlock a plethora of potentially useful information regarding the subject property.

Interview of any available key personnel with specific knowledge of the property conditions may include:

Owner, Tenants, Maintenance Foreman, Contracted maintenance services personnel or other contracted companies that routinely work on the property and/or building.

Property Inspection, Real Estate Inspection, Building Inspection, Due Diligence Survey, as they may be labeled in the due diligence report is essential to ensure sufficiency of construction considering the intended use of the occupants and the surrounding geography and climate. The furnishing of any available plans and specifications should be helpful here, but will not end the investigation. A current commercial property condition assessment should be done by a qualified third party inspection company experienced in the type of property to be inspected. A previously performed property condition assessment or inspection is nearly always furnished for the use of a single party in a single transaction and is protected under law and not reusable nor transferable to any other party. The focus of the inspection should be primarily on site condition and building components such as the site drainage, parking, building structure, mechanical and electrical systems and general accessibility and usability of the property. Various climates and geographical regions will require more specific inspection knowledge, thus hiring a local inspector is always a good idea if possible, in lieu of hiring a company out of Wisconsin to perform due diligence on a California high-rise building on a fault line.

Site Survey and Walk-Through to Observe Existing Conditions may include:

Grounds and Topography, Parking, Paving, Access, Building Exterior and Fa├žade, Building Interior, Roofing systems, Structural systems, Mechanical systems, Electrical Systems, Plumbing systems, Fire-protection systems, Vertical transportation systems, and any number of other specialty systems.

The 2010 Americans with Disabilities Act is the current guideline for accessibility standards nationwide and is a federal law, hence non-negotiable and to an extent, yes, it’s retro-active even for older commercial and public buildings. Many states also have additional and/or more stringent or specific accessibility standards as well. Most professional property condition assessment and inspection companies can also perform both abbreviated and complete accessibility surveys as part of a real estate transaction.

Basic abbreviated and full compliance Accessibility surveys may include:

Abbreviated survey looking only for basic ADA Accessibility components visible during the walk-through and documented according to the ASTM abbreviated survey form and checklist gives a quick check as to the general status of compliance. Full compliance survey involves physical measurements of distances, slopes, and push/pull forces required within the accessibility standards to allow for a certain level of physically disabled person to be able to successfully navigate a property, site, and building.

Environmental Due Diligence known as Environmental Site Assessment (ESA) is the most utilized Environmental Inspection Report. The typical level of report preferred by lenders to demonstrate adequate due diligence is called a Limited Phase I Environmental Transaction Screening ASTM standard E1528. This explores the past use of the property and the surrounding properties to identify any potential onsite or adjacent environmental problems or future liabilities. These reports normally require a significant monetary investment and take a number of weeks to complete so they should be done as soon as you have determined you will be moving forward with your due diligence. The purpose of this inspection is to determine if the property contains any hazardous materials or poses a threat in any way to its surroundings. This could be caused by underground storage tanks located on the property or runoff from the property into the water table or any other number of hazards listed by the Environmental Protection Agency. While the report is expensive, the cost of cleaning up an environmental hazard can be astronomical. While not every deal will require you to obtain a Phase I Environment Site Assessment, many lenders will require it as part of their loan guidelines. In case of a fairly new development with a clean environmental record and no neighbors of an industrial nature, a simpler less expensive and much quicker Environmental Transaction Screening ASTM standard E1528 may satisfy lender and legal requirements.

Any basic environmental due diligence report may include:

Research of historical site usage, aerial photography records, property transaction records, construction records, building records, EPA mapping data, local municipality topography mapping, and a through site walk-through to visually identify potential environmental issue indicators.

The information contained herein is purely professional opinion and provided for general real estate inspection reference only and is not intended in any way to be a definitive guide, nor a guarantee of past, present, or future legal or state or federal requirements, nor a measure of performance of any professional services company. Best of luck to you in all of your future property, real estate, and building dealings!

Agents and Realtors – Why Commercial Property Sales Is a Great Career Choice

When considering a career in real estate most salespeople start in residential property and that is probably due to the fact that residential property is everywhere. There is plenty of property to sell and it does not seem too complicated, after all we all live in houses and we know what makes up a great house.

Some real estate salespeople however look to expanding or specialising their skills and moving beyond residential property. In that case they can consider commercial investment property. Now one thing needs to be said here; commercial property is not hard, it is just different. Many of us in the industry would say that commercial is more interesting than residential property but let’s not start that debate. Suffice to say that commercial property is very stimulating and gives a totally different twist on the industry for those that feel so inclined. In commercial property you can really specialise.

One of the greatest advantages with commercial property is that it is based on logic and property performance. The emotion of residential property and the family home is no longer an issue. Most of the clients you deal with are business proprietors, investors, or owner occupiers of a corporate nature.

In commercial property the sellers and buyers do the deals because they can see an advantage or opportunity. Salespeople that work in commercial property therefore have to know how to interpret and display opportunity to a buyer.

The most significant advantage you have in working in commercial real estate is that you can focus on both commercial leasing and sales. Both are very lucrative to those that choose the career path. Property leasing underpins the investment aspect of commercial sales. In other words, a great lease will help a future sale. If you lease a property well, it is quite likely that you will be invited back to sell the property when the time comes.

Every property or tenancy lease should therefore be negotiated with the investment in mind. The landlord will have some targets and the lease should be created to match that landlord plan.

To be very successful in commercial real estate sales and leasing you should be prepared for extensive hard work and systemised marketing. You will have to know these people in your territory and market to tap into the property churn and spin:

  • Landlords
  • Tenants
  • Investors
  • Business Proprietors
  • Owner occupier businesses
  • Solicitors
  • Accountants
  • Planning Officers
  • Buyers
  • Sellers

All of these high level contacts have to feature in your database of activity. Build your business on constant contact prospecting with the people that invest, own, rent, and sell commercial property. Whilst implementing the necessary contact build your knowledge in commercial property types, methods of sale, and methods of lease, negotiation, and marketing. Your career in commercial real estate will gain traction very quickly. Success in the commercial property industry is based largely on the performance of the individual, and has little to do with the office you work in or for.