Are you thinking of making a Commercial real estate property deal?
Before you jump into a deal, you’ll want to watch out for these critical warning signs that the commercial property deal you think is unbeatable – might actually be a bad idea.
Below are some warning signs that your commercial property deal isn’t what you think it is.
1. Price per Sq Ft of the building, lot and lease rate of the tenant who is paying your rent. If it’s 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, the 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, lease options such as Triple Net, Double Net or Gross Lease that demonstrate who is responsible for which expenses.
6. Ability to get financing on the property (if necessary). Loan rate varies on a quality of the deal and could negatively affect cash flow regardless of the Cap Rate paid.
7. The need to have a team of experts by your side to guide you through a 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, tax advice- the advisors should stick to their own roles.
8. Keep in mind that the building you purchase 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 exchange rules and capital gain along with depreciation benefits before deciding on which asset to purchase. The residential-like apartments-versus commercial has different depreciation schedules.
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