Investing in Commercial Real Estate

Investing in commercial real estate may seem like a challenge, but it is really no different than investing in residential real estate. The typical office, retail, industrial, etc. properties are obviously commercial type properties. However, there is a major distinction when it comes to multi-family properties. Multi-family properties with four or fewer units are considered residential and properties with five or more units are considered commercial properties. Why is there a distinction?

One difference is how lenders look at these two categories. Four or fewer units are financed like residential properties and the lending criterion is based on the strength of the borrower. Does the borrower have sufficient resources and do they earn enough money to cover the mortgage? Five or more units are considered commercial real estate and the lender will usually finance the property based on the income the property produces. If the property has a positive cash flow, and the income can cover the expenses and the mortgage, the lender may overlook the borrower’s credit worthiness.

Is there a risk when investing in commercial real estate? Like any investment, there is always a risk. However, there are ways to help minimize this risk.

• Do appropriate due diligence. Work the numbers and make sure the deal makes sense. Does the property have a positive cash flow? Is the property free of hazardous materials? Does the property have clear title?

• Get accounting advice. Make sure the deal doesn’t have tax implications. Everyone’s tax situation is different.

• Get legal representation. Closing a real estate deal requires several legal measures. Have an attorney review the Offer to Purchase. This will insure the purchaser’s best interests are looked after.

• Work with a lender. A lender who will work to get the deal done and assist in getting underwriting approval in a timely manner is crucial to a successful transaction.

• Get buyer representation. Maximize the investing experience by working with someone who can assist in finding an appropriate property, analyzing the numbers and negotiating on the purchaser’s behalf.

Investing in commercial real estate can be very profitable and rewarding. Insure your first or next commercial transaction runs smoothly from the initial offer to a successful timely closing.

Note: Laws vary in different States, always seek legal counsel and work with an experienced Commercial Real Estate Broker.

Image Courtesy of David Niblack

Michael Setunsky is the Broker and owner of Michael's Commercial LLC serving the Northern Virginia commercial real estate market. He has been licensed since 1985 and a Broker since 1990. As a commercial real estate and business broker, he has earned the distinction for being one of the top commercial real estate producers in the Mid-Atlantic Region. He also serves on the Mid Atlantic Real Estate Marketing Association's (MAREMA) Board of Directors, and is a Commonwealth of Virginia licensed Instructor. He teaches Pre-licensing, Post Licensing Education, Broker's and Continuing Education courses. Visit his company web site at http://michaelscommercial.com/.

©2009 Michael’s Commercial LLC, All Rights Reserved – Investing in Commercial Real Estate – July 2, 2009