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Real Estate Investing

Commercial Property Values

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When a commercial property is for sale, you will want to determine the value to see if the list price is accurate. It’s important to not assume that the list price is the value of the property. Here are the steps to figure out commercial property values using the capitalization rate method.

How to Determine Commercial Property Values

The value of any commercial real estate is based on the amount of net operating income the property creates each year.

Each additional dollar of annual income increases the value of the property by roughly ten dollars, depending on where the property is located, and the age of the property. This extra net income can come from either receiving additional revenue in rents, or from reducing expenses by managing the property more efficiently.

How to Determine Income and Expenses for a Commercial Property

You will want to look at a rent roll to determine the income of a commercial property. The rent roll is a list of the rental income for each unit such as an apartment, self storage unit, mobile home lot or office. Be sure to look at the rent roll and not the pro-forma rent roll. The reason is that a pro-forma rent roll shows an expectation of the rent in future years and not the current rent.

Common commercial real estate expenses include real estate and personal property taxes, property insurance, commercial mortgage, management fees (on or off-site), repairs and maintenance, utilities, and other miscellaneous expenses (accounting, legal, etc.). You will want to consider the age of the property and consider any unexpected expenses you may incur with maintenance.

Keep in mind that you are trying to determine the actual amount it will cost you to operate the property, and not the seller’s current expenses. An owner may try to emphasize the income generated and minimize the operating costs involved in order to sell the property. They may also have unnecessary expenses that you would cut if you were the owner of the property.

Once you have identified the income and expenses and calculated a number for net operating income, you will want to look at the capitalization rate.

Capitalization Rates

A capitalization rate or “cap rate” is the ratio of Net Operating Income (NOI) to property asset value. For example, if a property was listed for $1,000,000 and generated an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%.

The final step of the process is to divide the net operating income by the cap rate.

Don’t Skip This Process when Buying a Property

Since buying commercial real estate is a large investment, it is important to not overlook this step when you are buying a property. If you assume that the list price is the value of the property, you may overlook a property that you deem too expensive or overpay for a property. By spending time to go through the process of calculating commercial property values, you will ensure that you have the accurate information to make an informed investment decision.

 
 

What Lenders Want in 2016

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2016 has started with a thud. As we know, real estate is subject to the same forces and psychology as the wider economy. With the dollar sinking and the rapid job losses in the West, lenders across Canada seem to be retrenching and moving to a more conservative view of the future.

With my many years of lending experience, I have seen this show before.

So as a potential borrower, you may be asking yourself what can I do to present myself in the best possible way?

Here are 4 tips that could help your deal move quickly through the approval and funding process:

1. List Your Relevant Experience

Lenders today are looking for borrowers who have direct and successful experience in the property type that you are looking to finance. Don’t be shy about listing all the relevant experience. For instance, if you have developed and leased 5 industrial buildings previously, give details about how well the project went. You can say it came in on budget, was leased at proforma, was leased ahead of projections.

Lenders want battle tested clients who can weather any upcoming challenges.

2. Provide a Detailed Upfront Package

Lenders don’t like surprises, especially in today’s uncertain world. Get your environmental phase 1 done, complete the engineering report, get an updated appraisal, get current financials.

The more a lender can get comfortable with the risks and mitigants, the quicker your deal will get approved.

3. Settle Partnership Details Beforehand

Most deals today have partnerships. This gets complicated when the lender is looking at who will provide the guarantee. I have seen many deals get delayed because the 5 partners argue as to who will be stepping up to provide this covenant. Lenders have to do a more intense KYC (Know Your Customer) on the guarantors and this process can sometimes take two weeks.

As best you can, try and settle these partnership details upfront before you send in the package.

4. Don’t Be Afraid to Show Some Downside Scenarios on your Proformas

Most borrowers think that its best to show very aggressive numbers on their projections. So if you are projecting a vacancy rate of 3% and the market you are in is 10%, most lenders are going to take 10% not 3%.

You will get credibility if your numbers are realistic and you have a built in margin in case things don’t go exactly as planned.
 



About the Author: Warren Appotive is a Vice President & Broker at Commercial Mortgage Corporation. CMC specializes in commercial real estate debt and equity placements by arranging commercial mortgages from $3 million to over $150 million on commercial real estate properties and portfolios across Canada and the United States.

For more information, contact wappotive@cmcorporation.ca

Commercial Property Purchase Checklist

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You have the funds, and you’re all too eager to invest in some commercial property. However, before dishing out such a large sum of money, as a real estate investor, you really need to ascertain the condition of the property in question and what it would take to make repairs. Presented in this article, is a brief commercial property purchase checklist that’ll help you determine what shape your investment is in.
Until and unless you’ve properly researched the commercial property, you shouldn’t jump the gun and enter a purchase agreement. Purchasing commercial property is a rather costly proposition that requires careful consideration. Be sure to incorporate this checklist.

What’s on the Outside?
A commercial assessment is necessary for determining if the building is in good shape structure-wise and what the cost-estimate would be, in the event “touch ups” or more extensive repair work is needed. Exterior areas typically include landscaping, the roof, parking as well as the building foundation and structure. Hire an inspector who has access to experts in the form of building code specialists, as well as roofing and construction contractors. When it all comes together you’re going to have a good idea of where your property stands, literally!

Building Systems
A commercial building inspection in this case typically includes the heating, mechanical, electrical, plumbing, ventilation systems and air conditioning. It’s the inspector’s job to ensure all systems are in good working order. If one of the systems is not up to standard, an inspection report will clearly state what needs to be replaced or repaired and the total cost. A commercial building inspection includes looking at the building alarms and sprinkler systems in addition to fire safety systems and security systems. Whether you’re taking advantage of commercial mortgages or not, you need to make sure all of this is in good working order as your investment must be protected in the long run.

Take a Peek
An interior inspector provides you with information on renovations or how much it would take to make interiors look more current and presentable. Inspections will determine if there are any safety issues that may arise. There are certain local building codes the interior spaces must meet. Interior elements such as the floors, bathrooms, offices, walls and kitchen facilities, among others, are evaluated for safety and living standards.

The Paperwork
Commercial building inspectors are also tasked with reviewing documents like certificates of occupancy, building plans, appraisals, construction permits, citations, surveys, maintenance records, environmental studies, floor plans and evacuation plans. The Document Review includes the emergency and fire safety system records – test documents, fire detection maintenance, inspection reports, fire extinguisher service documents and fire door inspection. Documents for an apartment complex pertain to rent records and inspection reports from local code enforcement.

It’s always good practice to take a look at past utility and tax bills before signing a purchase agreement. When determining an accurate value of the commercial property and going over your commercial property purchase checklist, do take elements like historical expenses and renovation/repair costs into account.

 

Commercial Properties for Sale

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Investments come in many shapes and sizes and people invest for all kinds of reasons. They invest in precious metals, foreign currency, financial stock and bonds, and in real estate. Some people invest short term and look for quick profits, while others invest in the long term in order to financially secure their future.
Regardless of the type of investment, or the reason behind it, the single purpose of an investment is to deliver profits, and very few investments provide returns like commercial properties. They provide a considerably higher income potential, lower competition, reduced risks, tax benefits, equity build-up, long term capital appreciation, and much more. Qualified commercial mortgage brokers can help you make the right decision and get you the proper financing required for such investments.
 
The Flip Factor: Investing in commercial properties and ‘flipping’ them for quick returns is a resurgent trend in the industry. The popularity of commercial real estate investments is due to the fact that they often provide positive returns. An investor can raise debt, either through banks or through private investors, purchase a property, renovate it, and resell it for considerable profits. A great way to access these sources of financing are through commercial mortgage brokers.

 
Talks of Finance: Compared to residential real estate, it is often more challenging to find financing for commercial properties. Options can include finding a private investor, or using a combination of financing from a bank or other lenders. The down payments required for commercial real estate are larger than those needed for residential properties, and therefore, you will usually need someone to finance your acquisition. You could also raise capital by placing new commercial mortgages on your existing properties, a great way to access the built up equity in your portfolio.
 
The Property: There are various types of commercial real estate, and you need to consider carefully which one to invest in. You could opt for office buildings, residential towers, industrial property, self storage units, and even retail stores. These properties can then be renovated and rented out to generate a regular stream of income, or sold to harvest quick and substantial returns.
 
The Land: There are tremendous benefits to investing in commercial properties for sale. Not only do they provide current income and spendable cash, but they are incredible securities for your future as well. If you happen to choose the location wisely, you can earn income indefinitely even if the property reduces in value. This is because the land it sits on will continue to provide intrinsic value and revenue generating opportunities.
 
Due Diligence: There are several factors that you need to consider, most particularly your ability to repay the loan. A detailed conversation with your commercial mortgage brokers will be necessary. You also need to ensure that you can recover the full amount of the loan from your investment, including the interest accrued. The due diligence process is also extremely vital when purchasing investment properties.
 
Once you have carefully evaluated all the relevant factors and have avoided the potential pitfalls, you can put pen to paper and begin to reap the plethora of rewards from investing in commercial properties for sale.
 

Investing in Commercial Real Estate

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In an increasingly complex and competitive business world, more and more people are searching for ways to supplement their income. The days of a single breadwinner in the house aren’t as common, and even multiple earners are working to manage the household finances. Of the many avenues available through which earnings can be improved, investing in commercial real estate remains one of the most secure and profitable.

 

The Reasons to Invest

The Economy: Commercial real estate makes perfect sense as an investment choice. It is a relatively secure financial venture, compared to most other options, and it adds a lot more zeroes to your bottom line as you can enjoy plenty of economies of scale. You can effectively manage a considerably larger number of offices, apartments, etc. compared to residential houses, and you can do it all at reasonably low costs.
 
The Value: There are considerable differences between the valuation of commercial and residential properties. The income derived from a commercial property is based on its usable square footage. Commercial real estate leases last longer than residential ones, and the yield per square foot is also higher, which lends commercial properties with greater cash flows.
 
The Finance: A major benefit of investing in commercial real estate is that you can start with virtually no money and still purchase multi-unit properties. This can be achieved through private money investors, or a combination of bank loans and owner financing. Commercial loans also tend to be considerably more lenient compared to residential ones. The biggest benefit however, is that you can take out commercial mortgages which allow you to acquire new properties through equity raised from your existing portfolio.

 

The Tips for Investing

Take Your Time and Give Your Time: It is essential when investing in commercial real estate, to take as much time as you need in order to avoid rushing this important decision. Remember that commercial properties are a long term investment and that you will have to devote significant time to them if you want any profits.
 
Think Big and Then Bigger: If you are going to use commercial financing one way or the other, then why settle for small properties? You can benefit from economies of scale by purchasing more units, and of course, earn more money at the end of the day.
 
Learn, Learn, and Learn: Although investments in commercial real estate have a high probability of being profitable, there is still a lot you need to learn about the business before you reap its rewards. Arm yourself with as much knowledge as you can, learn all the rules of the trade and make sure there are no surprises in the details.
 
Relationship Matters: It is critical that you maintain good, long term working relationships with your investors and lenders. This will help when looking for commercial mortgages. The very nature of commercial real estate investments often demands that you work closely with partners, and a strong established network can only help you find more and better deals.
 
The Finance Equation: In matters of finance, as in most other things, it is better to be well prepared. Commercial loans differ from residential ones and usually require larger down payments. Therefore, you need to find good, solid financing for commercial mortgages well in advance and you need to make certain that you find the best lenders in your area.
 

The global marketplace is an increasingly volatile place, with high risks and no guarantees. It is always wise, in such situations, to plan and prepare and investing in commercial real estate can be one of the most reliable ways of ensuring a secure financial future.