ProInvestor
New Contributor
---Reply to 1st Post
Off the top of my head - Mortgage is going to be around $24K per yr (based on 10% I.O.),
Rent is $38,400 p/yr, meaning +CF of $14,400 per yr.
After 3 years, Rent falls to $19,200 - $24,000 = -$4,800 (thats minus), or rent drops to zero because they don't renew (or you add all your profit for 3 years into the building and then you are say $19,200 - $20,000 = -$1,000 (minus), assuming they rent out the building...
You are going to have to look at the research with a focus on where the market will be in 3 years. Is there going to be demand for that type of building, etc. Find out growth stats for the area business and work out in a down turn whether the building would still be rented.
Most commercial landlords would see no tenant after the three years, and I would approach it in a similar way (that way it avoids unpleasant shocks). Lastly look to make sure there were CPI/inflation rises in the contract. if there are none sometimes it's a sin that the landlord was perhaps desperate to sign a lease - and why? because they needed a tenant to pay the mortgage. Work out whether you would be in the same predicament.
Talk to commercial real estate / property management firms about the area. Are they seeing strong demand? Is employment growth increasing in the area? Is the local area reliant on one industry/employer??? If so is it strong enough to last a while???
---Reply to 2nd Post
Commercial Real Estate encompasses many different types of real estate - retail (big box retailers to strip malls to individual shops), industrial (warehouse, factory, etc) and residential (multifamily and accommodation -hotel/motel) and lastly offices.
Residential is the easiest to get (as it really is an offshoot from the normal 'residential' market). Residential/Multifamily is considered commercial because of the financing. it is seen to be safer because you have multiple rent sources and it is relatively easier to research and decided to invest. Leases are not so important compared to the payment history of tenants (most residential leases tend to be short term, less than a year, rather than say a 9 year lease on industrial).
Retailing can be a very specific market and trends tend to be very important - for example in a small market the opening of a Wal-Mart can destroy small malls / strip malls in the area. So focus must be made on whether the market can handle the amount of shops (consumer spending is a very important stat) and whether the market is growing and how it is changing. Leases are important when valuing.
Industrial is the hardest option to deal with, because owning a massive industrial complex in the middle of nowhere can be almost impossible to rent out or sell. It is important to look at the dynamics of an area to work the best industrial investment and take a look at the whole business environment and the specific industry. it is better IMHO to buy in city not rural area. Leases are absolutely vital in these cases.
Offices - look at (white collar) employment growth. Look at the local, state and national economy. Look for large population centers and/or pro business, fast growing areas.
Lease importance is in between industrial and residential. Very important but strong demand can balance out a short term lease.
---
My thoughts anyway.....
Rgds.
ProInvestor
Off the top of my head - Mortgage is going to be around $24K per yr (based on 10% I.O.),
Rent is $38,400 p/yr, meaning +CF of $14,400 per yr.
After 3 years, Rent falls to $19,200 - $24,000 = -$4,800 (thats minus), or rent drops to zero because they don't renew (or you add all your profit for 3 years into the building and then you are say $19,200 - $20,000 = -$1,000 (minus), assuming they rent out the building...
You are going to have to look at the research with a focus on where the market will be in 3 years. Is there going to be demand for that type of building, etc. Find out growth stats for the area business and work out in a down turn whether the building would still be rented.
Most commercial landlords would see no tenant after the three years, and I would approach it in a similar way (that way it avoids unpleasant shocks). Lastly look to make sure there were CPI/inflation rises in the contract. if there are none sometimes it's a sin that the landlord was perhaps desperate to sign a lease - and why? because they needed a tenant to pay the mortgage. Work out whether you would be in the same predicament.
Talk to commercial real estate / property management firms about the area. Are they seeing strong demand? Is employment growth increasing in the area? Is the local area reliant on one industry/employer??? If so is it strong enough to last a while???
---Reply to 2nd Post
Commercial Real Estate encompasses many different types of real estate - retail (big box retailers to strip malls to individual shops), industrial (warehouse, factory, etc) and residential (multifamily and accommodation -hotel/motel) and lastly offices.
Residential is the easiest to get (as it really is an offshoot from the normal 'residential' market). Residential/Multifamily is considered commercial because of the financing. it is seen to be safer because you have multiple rent sources and it is relatively easier to research and decided to invest. Leases are not so important compared to the payment history of tenants (most residential leases tend to be short term, less than a year, rather than say a 9 year lease on industrial).
Retailing can be a very specific market and trends tend to be very important - for example in a small market the opening of a Wal-Mart can destroy small malls / strip malls in the area. So focus must be made on whether the market can handle the amount of shops (consumer spending is a very important stat) and whether the market is growing and how it is changing. Leases are important when valuing.
Industrial is the hardest option to deal with, because owning a massive industrial complex in the middle of nowhere can be almost impossible to rent out or sell. It is important to look at the dynamics of an area to work the best industrial investment and take a look at the whole business environment and the specific industry. it is better IMHO to buy in city not rural area. Leases are absolutely vital in these cases.
Offices - look at (white collar) employment growth. Look at the local, state and national economy. Look for large population centers and/or pro business, fast growing areas.
Lease importance is in between industrial and residential. Very important but strong demand can balance out a short term lease.
---
My thoughts anyway.....
Rgds.
ProInvestor