Considering purchasing a commercial real estate property?
Before you jump into a deal, you’ll want to watch out for these critical warning signs that the deal you think is unbeatable – might actually be
a bad idea.
Below are warning signs that deal isn’t what you think it is.
1. Price per Sq Ft of the building, lot and lease rate of tenant that is paying your rent. If too high on any of these components you may want to void the purchase. Overpaying in the beginning places you in a hole that you may never recover.
2. Cap rate must be reasonable compared to other similar properties sold not just on the market.
3. Demographics such as household income , growth of the area, traffic counts near the property in question, a 1,3, or 5 mile radius of the site is what matters most.
4. The lot size, the configuration too much depth and too little width can hurt, visibility, ingress and egress, medians in the street, zoning issues.
5. Lease ingredients such as increases in the rent, outs by the tenant in the lease, options , triple net double net or gross lease that demonstrates who is responsibility for what expenses.
6. Ability to get financing, if necessary, on the property and tenant. Loan rate varies on quality of the deal and could negatively effect cash flow regardless of the cap rate paid.
7. The need to have a team of experts by your side to help guide you through a sale or purchase such as a professional experienced commercial real estate broker, lawyer and CPA. Each of these pros has a specific role and each should not give advice on topics they are not responsible for.
Valuation, legal documents and tax advice or totally different and the advisors should stick to their own roles.
8. The building you purchase, keep in mind, should not be so unique that other users in the future cannot occupy the building without spending a very high cost to restore for their purposes.
9. Lease rates must be within the norm based on the cost of the rehab. If you pay a low cap rate based on a high rent for the area you will end up with a potential disaster in the end.
Learn and understand your exit strategies, 1031 rules and capital gain along with depreciation benefits before deciding on which asset to purchase. Residential-like apartments-versus commercial have different depreciation schedules.