Like anything else in life, when deciding to choose a commercial income or investment property to purchase, set your goals and plan ahead before starting.
To begin the process, determine your long or short term goals, your risk reward tolerance level and you’re expected returns on investment. Are you more interested in a quick profit or a long-term strategy of steady income and appreciation over numerous years.
Are you concerned with tax benefits, write-offs and low capital gains in the future or simply value added property opportunities?
Once, in your own mind, you’ve determined your goals, surround yourself with a professional real estate broker, attorney and CPA to help guide you through the due diligence and final conclusion of a purchase, sale or 1031 trade.
You have endless options, whether it’s buying a triple net lease ,an apartment complex, office or warehouse building or be involved in assisted-living, student housing or simply partnering with more experienced investors, the choice is open and wide. Many investors prefer to place all their money in a single asset, controlled by themselves ,and others want to diversify into various sectors and be guided by the top pros in the field.
Expected returns today range from Lows of 4% and highs of 8% without a very substantial risk of losing equity. There never are guarantees in any real estate or stock purchase, just getting the odds in your favor using common sense and statistics behind your choices is the way to go.
The due diligence process usually ranging from 21 to 45 days with the closing there after of about 15 days is the norm in the real estate business.
During this process title, survey, lease, environmental and ask all the basic questions to determine whether the investor wants to close on the transaction or not?
Of course having the experience or the knowledge of asking the appropriate questions about each investment or income property will determine your success in the future. Don’t be too overconfident and think that you know the correct questions to ask without consulting your team members. Missing one important answer could lead to a total failure in the long run.
The significant questions about properties and tenants are numerous and varied and need to be examined thoroughly before purchasing a property.
Examples such as:
- What are the past sales figures of the tenant (to see how well they are doing at their location)?
- Is the rent that the tenant is paying the average for the area and the building or is it over or under priced for the marketplace?
- What entity is signed on the lease and guaranteeing the payment to the investor?
- Are there any outs in the lease or any increases over time?
- Does the pro forma presented to you, the investor, include items such as management fee, leasing fees, vacancy factors or loss of rent and capital reserves set aside for future replacements?
If the investor is requiring a loan, you need to look in advance to commercial lenders and provide them with enough information about the investment opportunity that will give them the ability to quote a possible loan scenario for the purchase! With this knowledge you’ll be able to determine a true cash flow after subtracting the expenses from the gross income of the project minus the debt payments.
This now will give you a more accurate cash on cash return for the equity you are providing into the deal along with depreciation benefits that may shelter some or all of your taxable income.
If this property has multi tenants and not a true triple net solution, you need to make sure you have lined up the proper management and leasing pros along with workman ,if you have not determined to do it yourself.Tags: 1031 trade, commercial income, CPA, investment property