The most basic rule in purchasing commercial real estate says: “Choose a good property in a good location for a good price”. Sounds pleasant but what is hiding under bright advertising? How to determine hidden obstacles and how to count risks? These and some other common questions could become a pressing issue in your choice.
The first point you are looking at is, of course, the location of your potential property. As you can guess each property type requires its own features and activities. Set of special attributes is the necessity for different types of commercial real estates. You also should mention such things as ingress and egress from the road. Do not forget to mention on the office buildings benefits. Another important feature to look at is a relatively easy freeway and public transit access. Surrounding development is another necessary thing for the office building.
DCR or “Debt coverage ratio” is a special metric for lenders.
In such a way, they count if they should and would lend money on the property. It is easy to calculate. The principle of counting is dividing the property’s net operating income by the amount of a year’s worth of mortgage payments. It is also the annual debt service. This debt coverage ratio should in all cases be positive and the net operating income should be shown greater than the DCR. Tenants. Initial lease term is a very important condition in your choice. You should always remember that long leases are much better than short. Mention, that if you don’t have every tenant’s lease renewing at once, you can stagger out your risk. That’s why pay big attention to tenancy.
What do you know about additional expenditures which you didn’t see at first? Such unexpected things like roof replacements and tenants’ improvements could become a real problem if you face them without any warning. Usually, on marketed commercial real estate, you can’t see these expenses, they typically are excluded. That’s why you should be prepared for sudden capital expenditure. Plan how you will handle this situation ahead.
Liquidity and Leverage.
As an experienced businessman, you should know that leverage sometimes can be a good condition in positive marketing swings. It is true, but sometimes it is also restricting feature. Use of debt is also a limitation for the amount of money available for problems and emergencies. Consider ahead how you will get out in case of real problems and found your liquidity pool. Create your floating ring for the future “commercial real estate quake.”
Work with experts.
Experienced investors usually choose to work with experienced commercial real estate agents for the best and successful outcome. Investment in commercial real estate includes a significant cash commitment and investors in general work with partners or investment groups to purchase larger commercial properties. We hope that these tips will help you to expand more knowledge about investing in commercial real estate. If you need more information, please contact a reliable commercial real estate broker that will be able to answer your further questions.