Dispelling Myths

[yveskleinsky]

The more I learn about commercial property, the more it flips my world inside out! It seems like there are several reverse "truths" in effect (these truths are reversed from how residentail real este is generally done):

1. The more expensive the property, the more money the buyer will have to come in with.
It seems like the more expensive the property, the more the seller is willing to help carry- or the more investors are willing to group together to make it work.

2. The buyer will need a substantial income in order to qualify for the loan.
Based on my research, I am finding that if a commercial property can cashflow itself, the buyer just needs good credit.

3. The risk goes up when taking on multiple units.
It seems the risk is actually greater with the fewer number of units a person has.

4. The value of commercial property is hard to increase and hard to determine. One market cycle can knock you out!
After reading posts here from Steve O and Andviv, it seems that the value of commercial property can be increased by either 1. capital improvements or 2. increasing the NOI...which can DRAMATICALLY change the value of a building/business within a couple of years. Commercial value is determined by a commercial appraisal, Cap Rate and NOI. Residential market cycles have very little -if nothing, to do with commercial real estate.

Can anyone list other truths/myths they have encountered regarding commercial property? How about any tips?

 

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[SteveO]

1: For good quality and well run properties over 5M, you might even be able to 85 to 90% LTV. Track record will count here.

2: The lenders will determine themselves if the property will cashflow through their own financial analysis. Again, they want so see some success or experience on the team. I have never seen anyone get turned down that has reasonable credit.

3: The money at risk will go up. Try to get non-recourse financing if at all possible as this will reduce the risk significantly. Fewer numbers of units certainly makes the income and expenses fluctuate more as a percentage.

4: There are a number of experienced investors that only do "value added" deals. They can be done with office, retail or apartments. I specialize in apartments because that is what I know. It is easy to find something that has below market rents or mismanaged income/expenses once you know what you are looking for.

Everyone that goes into these ventures is trying to make money. Some people don't do a good job or run out of resources for one reason or another. Those will usually be the opportunities. The trick is to figure out which ones they are.

 

[andviv]

The first time I saw the effects of "small" changes in properties with many units I got hooked into multi families. A small increase in rents usually translates into a higher NOI. I've seen cases where a 2.5 or 3% increase in rents improved the value of a fifty-something units by many thousands of dollars.

I will not pretend to be an expert --we have SteveO for that, he is the real expert-- but I do notice that most investors start by analyzing the property instead of researching the area first, I know I did. The lesson number one I got from my mentor was "Research the area". I've seen many "great deals" where the numbers look great but then you can't find a property manager that wants to take care of the place as the location is terrible. I just saw a case like this today. Friends ask me about how great the numbers are but when I ask them what is around the property, who the tenants will be, what other properties offer the same product, people have no clue.

Going back to improving the value... Yes, capital improvements should be done with only one purpose: Get more/better renters. It is a marketing tool. It is not about making the place look better for the fun of it, it is to make it more attractive to potential renters and to allow for rent increases to the existing ones.