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Commercial Properties...Before You BuyI get asked this question frequently, What should I do before I buy any commercial properties?” Well, there are 3 items you should do BEFORE you buy that first commercial property. #1 Show Me The Money Many investors watch those late night infomercials and dream about buying properties with no money down. They want to make zillions of dollars in just 30 days! Let’s dig deeper than the hype and take a look at what is practical. Yes, you can get creative with the financing, like seller carry backs or 100% LTV financing. (Side Note: A 100% financing isn't what it seems. Read why...) But that doesn’t mean you shouldn’t have ANY money. You should have enough discretionary money set aside specifically for investing. This can be in the form of savings accounts, stocks/mutual funds or credit cards (be careful with the credit cards and only use them as a last resort!). Even if you are able to get 100% financing, you will still have to pay for some pre-closing & closing fees. Some of these fees include appraisals, environmental reports, credit reports, document preparation, loan origination, etc. You will also need to have money in reserve to take care of any maintenance issues, legal issues and so on. How much money should you have? Well for pre-closing & closing costs, you should budget 3% – 5% of the loan amount. You might not need all that you have budgeted…a lot depends on the lender and their requirements. But it is wise to have the money set aside just in case. As far as money needed for reserves once you have the property, depends on the condition of the property. Will the property need any big ticket items in the near future, like HVAC or roof? Will the parking lot need to be re-paved? This is information you will obtain during the due diligence phase of buying the commercial property. As a rule of thumb, budget at least 1% of the property value as reserves. Also, some lenders will require that a portion of the monthly income from the property be maintained in an account for these types of maintenance issues. Where Can You Get The Money? Well one overlooked source for real estate investors is real estate notes! Do you currently hold a mortgage note? Then why not sell it? There are nationwide mortgage note buyers available to help you. Educate yourself about other investment opportunities through these investment guides. #2 Protect Yourself! No I don’t mean weapons…I mean legally! We live in a very litigious society, where anybody can get sued over anything. Protect yourself; don’t own investment commercial property in your own name. Use a legal entity like LLC or corporations to protect yourself. And forming LLC's has never been easier! Remember it is not if you get sued…it is when you get sued, are you prepared? #3 Have A Good Team You should begin assembling your team now. Ask for recommendations from other investors or network at your local Real Estate Investment Associations (REIA’s). Who should be on your team?
You should interview them and make sure that you can work with them. Don’t wait for a crisis before you have your team in place, start now.
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