Commercial
property can seem like the ultimate form of real estate investment. And when
proper due diligence is done apartment properties can become a cornerstone of
your investing business.
The
ugly flip side is a field of scattered and broken dreams.
Many
investing failures could have been prevented if only a little homework was done
before inking the deal. It’s not hard and it isn’t rocket science.
Here
are just a few important areas you should be aware of before
taking the plunge. They may seem like common sense to you as you read them. But
you’d be shocked if you knew how many commercial investors overlook the
simplest things.
1. Failing to inspect
the apartment buildings...again, just before closing. Of course you’ll
inspect the apartment during your initial evaluations. You decide to buy
and secure your financing. You’re all set to take over in a month or two.
Be darned sure you have a close look before you
close the deal. This is important especially with older apartments. But even
newer complexes can have their issues.
It’s a smart idea to have a professional inspector
do this. This is what they do for a living. So they know what to look for. More
often than not, they’ll uncover new problems or even problems overlooked by
you.
2. Only work with
experienced commercial property lenders. Forget your regular bank. They do
not specialize in apartments or commercial property investments.
Commercial mortgage brokers understand more than
you do, or your bank, when it comes to investing loans.
3.
Don’t invest in
apartments under the assumption you can just raise rents and make a lot of
money. The real world doesn’t quite work that way. Ask yourself this
question...
Why is the seller unloading this property? If it
was so easy to just raise the rent, why doesn’t the seller just raise them and
make more money?
The critical observation in any scenario is to
look at the existing rent prices for the property. How does that mesh with the
asking price?
Take existing rent fees into consideration for
your offer. And think critically about any statements on the rent being too
low. Again...if the rent is too low, why doesn’t the seller just raise them?
4 .
Failing to
comprehensively examine income, expenses, and taxes over a period of time.
Sometimes you’ll find potential landmines just waiting to happen.
Always ask to see the corporation’s returns for at
least the last several years. This will help you have an accurate idea of how
the property performs in real life.
Then contact the county assessor’s office and ask
about the location’s tax situation. The important items include last years
taxes, the current years taxes, and if taxes will increase next year due to the
sale of the property.
Doing this can reveal potential large, unexpected
costs to you in the future.
Looking into the
future and pretending you’re the buyer...5 or 10 years down the road. This
is a bit of a judgment call on your part. But you’d be surprised at how
you may feel about the property and location.
Take a good look around and imagine what the
grounds will look like in 10 years. How about the surrounding area? How are the
neighborhoods nearby?
If things look a little run-down, how will they
look in the future?
If there’s a lot of open space next door...fields
or woods, for example, you might want to find out about it. Who owns it? Are
there any existing plans to develop it? You never know, maybe someone wants to
turn it into an industrial operation.
How will any surrounding developmental plans
impact your apartments?
Use your imagination as you do this. If you don’t
have good feelings about it, then listen to that and act accordingly in your
best interests.
Learning
how to spot potential pitfalls can save you a lot of money and headaches.
Investing in commercial properties such as apartments can be lucrative if done
right. And the smartest thing you can do is become educated and learn from
those who’ve traveled before you.
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