a question on beginning investment in commercial real estate?
i am trying to invest in commercial real estate. Would it be better to set up an LLC first, and then buy property; or try to do both at the same time. The property im eyeing says it has a 10% CAP, but im a little doubtful. I should be able to request for certified financial statements(Cash flow statement, ect.), correct? Any other advice?
The journey of one million miles starts with a step.
- 9 years agoFavorite Answer
Commercial real estate is also a good investment. This is because due to the fact that its market value goes up every year. Furthermore, you can get some tax deed and liens on properties on foreclosure which are of commercial value for a potential business.
- 9 years ago
Wait until you buy the property. In large transactions, you're expected to form a new, bankrupt remote company to hold the property. The requirements for that company may have certain conditions required by your lender; so sometimes it's a waste to form an LLC because the lender will just say to start another one. For example, my brother and I formed an LLC to buy a property out of state. After we had formed it, our lender required us to use a corporate form in the state where the property was located, so we had to start all over again. Anyway, forming an LLC can be done very quickly; in my state (Colorado) you can do it on line in about 20 minutes.
Good luck starting out on commercial RE. When you look at quoted CAP rate, be sure to know the difference between their pro forma numbers and their actual numbers. Pro forma can be wildly inflated and might not reflect the vacancies at the property. Any legitimate seller would be willing to provide you with the actual financials of the building. but you might be required to sign a confidentiality agreement first. Reviewing the leases is very important, and I've always found interviewing the tenants a good idea; the landlord may be hiding the fact that the largest tenant's lease is up, the tenant has a dispute. or the tenant has already sent in a termination notice.
- 9 years ago
You are smart to be doubtful. I never take cap rates at face value. Absolutely get the statements on the property (I would ask for a couple years worth). With that you can put together your own proforma. Build in a vacancy rate (even if the property is 100% leased), a management fee of 3-4% and reserves of $0.10 to $0.20/square foot. Please note that these are just estimates and that the property you buy and the market you are in would determine what is most reasonable to project.
Having a broker represent you might be helpful. At the very least, you can visit their websites and download free market reports to get a sense of where the market vacancy rate and asking lease rates are in your area (if you're in a populated enough area.)
Be sure to read the leases thoroughly. Make sure you know what you are responsible for versus what the tenant is responsible for (is it a NNN or gross lease). Make sure that they don't all roll (expire) at the same time or too close together that it would be stressful to find tenants. Also look to see if any have early termination options. Plan for things like leasing commissions and tenant improvements (again depends on the property.)
BTW: I'm working on putting together a site that addresses some of these very things. www.propertywarrior.com. It may be awhile before it's up since I'm very technically challenged. But you can check on it in a month or so.Source(s): Currently work in commercial lending
- gendernalikLv 43 years ago
Paul, Gently might I respectfully remind you that the present loan main issue was once triggered by way of "expertise truly property traders and their industry who accredited greater hazard loans". A probability exists you would persuade a relative, private pal or person who has been dwelling below a bridge the beyond 2 years to permit you the satisfaction of being a estate flipper on this contining downward marketplace. Public and Private creditors right here (CA.) search a 50%+ LTV, a enormous fairness function, co-signer with enough internet earnings, gigantic features and maximum feasible authorized curiosity in a instant constructive coins flowing estate. There isn't any means they're going to permit you to make any cash..... Good Luck