Your choices for this type of real estate investments include apartment buildings, self storage facilities, mobile home parks, office & retail, shopping centers or warehouses. The most important consideration when buying commercial real estate is to make sure that you get a positive cash flow each month. This is actually becoming easier with the recent changes in the marketplace, again, with the big “IF” you are buying right.
Commercial Property can be Purchased at Bargain Prices Commercial real estate is now available at lower prices and with better rates of return than investors have seen in many years. There are 3 main reasons for this:
1) Bubble investors overpaid for commercial property – Just like single family homes, over-eager investors have paid too much in recent years for properties based on the hope that prices would continue to go up forever. Now that the market has adjusted, these investors are looking for a way to get out. Unfortunately for them, the only way out in many cases will be for the asset to go into foreclosure unless the lender is willing to entertain a workout with the property owner, or with a potential buyer.
2) Commercial property loans are more difficult to get – Now that conditions have changed, the lenders are of course, pulling back. Most lenders today are only interested in funding commercial properties that are “performing”. This means that the property is fully rented except for a small vacancy rate, and that the income from the property is covering all of the expenses leaving a positive cash flow for the seller as a cushion in case the market gets any softer. If a commercial property has been mismanaged, or if the vacancy rate has been too high, then most lenders want to see the property turned around and operated successfully for at least a year, and in some cases for a full two years before the lender will consider lending funds secured by the real estate.
3) Creative funding can be used, but most brokers don’t understand it – Sellers who have to sell in this market may need to be open to creative funding, but most commercial brokers only have experience structuring conventional transactions. This means that if the real estate has been mismanaged, or has a high vacancy rate, then no matter how hard the broker tries to sell the property, if they are relying solely on conventional financing, then the likelihood of getting to a successful closing is bleak.
These three factors are creating opportunities for investors who understand how to approach commercial brokers about creative financing for commercial assets, and who realize that in this market they can put together non-conventional transactions using methods such as a Master Lease Option, Owner Carry Financing, and Buying Using the Existing Financing. Once you understand these ideas you’ll be able to build your commercial property portfolio right now during the real estate downturn rather than waiting for lenders to start lending again.
This gives you the chance to get into owning commercial property at a time when prices are favorable, and because conventional lending is not readily available, sellers and brokers are much more open to buying with creative financing methods.
Tags: commercial property