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Need To Hire A Commercial Real Estate Attorney?

As a new investor or perhaps you are a experienced real estate investor working on a complex deal, you may consider it necessary to use an attorney during your commercial real estate transaction. There are a few things you need to consider before you engage the services of a commercial real estate attorney.

How Do Attorneys Help Commercial Real Estate Investors?

First and most important, they help identify, negotiate and manage the risk. This is why it is ideal to find not only a commercial real estate attorney but also one whom invests in commercial real estate.

The attorney will help you draft and negotiate the contract. You would not think about performing heart surgery without the proper education and experience, yet many students try to document their own commercial transactions without the proper experience and without using an attorney.

Usually it ends up costing them because they lose their earnest money deposit or they spend more on due diligence expenses because they did not write the contract correctly. Next, attorneys will look at the facts and the laws objectively. Since they are not emotionally involved, they are able to ask the right questions.

Last, utilizing a commercial real estate attorney takes the worry out of the transaction. You know that you have the proper documentation in place and that you are protected by the law.

When Do You Hire A Commercial Real Estate Attorney?

Complexity
First, look at the complexity of the transaction. If you are issuing a standard Letter of Intent (LOI) it is unnecessary to incur the costs to engage an attorney. However, when you are getting ready to go to a purchase contract you should definitely engage a commercial real estate attorney, because it is critical that your contract covers all the stipulations of your due diligence and closing requirements.

Risk
Next, look at how much risk is associated with the transaction. On an apartment lease, it is unnecessary to have an attorney draw up each lease for each new tenant that you get. In this case, you can use a standard lease that is drawn up one time by the attorney. When you are negotiating a ten year lease with a national tenant, it is important to dot your “I’s” and cross your “T’s”, so an attorney needs to be involved.

Legal Documents
If you are initiating a standardized procedure which will be utilized over multiple projects, it makes sense to invest the money one time. This way you know legally you have it properly documented. I have done this to standardize my leases, my Letters of Intent and my construction contracts.

Negotiations
If you feel that your negotiations are becoming emotional, a commercial real estate attorney needs to be involved. An attorney can make it more mutual between the parties involved because they are looking at each point with no emotions. This is not only helpful when trying to resolve a dispute but it is also helpful when negotiating a lease or purchase contract.

Deadlines
Last, when timing is critical and dead lines need to be met, an attorney can make sure a seller is staying on course. We have experienced this when a seller drags their feet and we need something from them in order to present to a zoning committee. The attorney can legally force them to get it done. They can also make sure that you do not lose a deal or your earnest money. If you miss a closing date but are working toward the closing, the attorney can buy you some time so that you get the deal closed.

How Do You Find the Right Attorney?

In order to find a good commercial real estate attorney, look into their reputation, by checking not only with their clients but also with their peers. Find out what their business relationships have been like. Ask other investors for a referral or ask your banker, accountant and network groups.

Also, verify what their cost is so you are paying for the level of service that you need. Donald Trump’s attorney may be the best in the country but is doesn’t make sense to pay his fee for a $250,000 transaction.

When you are in a situation where you are considering using a commercial real estate attorney, always weigh the risks versus the rewards and make sure that you always use a commercial real estate attorney.

PositionRealty.com
Office: 480-213-5251

Know the Players in Commercial Real Estate

Every line of business has its pundits who like to refer to the business as being a sort of game. I don’t dismiss this notion, and actually am a believer that game theory has its place in real estate. Every game has an objective, a set of rules, a concept for what it takes to win, and of course players or participants. Who are the players in commercial real estate? This article explores that very issue.

First, let’s look at this from the investor side of things. Every market has investors, large and small, who are interested specifically in commercial caliber real estate. Some of these are what I call Tier One investors, who look for small to medium-sized commercial buildings. Tier Two investors look for even larger buildings (exclusively so) and Tier Three investors are perhaps the biggest players of all, responsible for developing new properties.

While this player breakdown is pretty loose and definitely unofficial, I think you get the general idea. Some investors are finders of properties and some are creators or developers of properties. Any and all of them may build funding for their projects through collaboration with others but all are people you would benefit from knowing in your area as you start building your own business. These players may have deals to offer and some may be interested in collaboration so these contacts are essential.

Next, we have professional players, who would include personnel like commercial realtors, bankers, appraisers, property managers, contractors, bird dogs and the like. As you can imagine, these players are also very important but they are more from a supporting role to help get things done in the world of commercial real estate.

It is no less important to know the professional players because, without them, you will find the business of commercial real estate much more difficult to navigate. A great way to build a business is to start assembling a team of professional players, who will both help introduce you to investor players, but will also give you more credibility when you make contact with other investors.

Last, we have the behind the scenes players, who would include city or county officials, code enforcement reps, planning and zoning specialists, architects, and engineers. These personnel are no less important to playing the commercial real estate game and are arguably the most integral, given that seasoned investor players regularly and effectively use behind the scenes players as a part of their successful formula.

When you embrace the game aspect of commercial real estate and recognize that there are indeed players you must recognize, your own ability to play and play to win will go up dramatically. When this happens in this business, profits are soon to follow.

PositionRealty.com
Office: 480-213-5251

Developers Scramble to Catch Up With Apartment Boom

Developers are ramping up apartment construction across the country to cash in on rising rents. Multifamily construction is at nearly two-thirds of its pre-recession peak; single-family home construction is about a third of its way back, David Crowe, chief economist at the National Association of Home Builders, told The New York Times.

The multifamily construction boom is strongest in the South and West, where employment is picking up, and it’s being driven by young people who are delaying home ownership.

“People in their early 30s, the age when many might look to buy a first home, are renting for longer periods of time, partly because mortgages are difficult to come by and partly because they have been unnerved by the turmoil in the housing market,” The New York Times reports.

Meanwhile, developers are rushing to meet the demand. Markets like Houston, Denver, Phoenix, Oakland, Seattle, Miami, and Charlotte, N.C., are seeing increases in rental demand, according to housing surveys.

“The demand for building is all over the country, really,” says Ric Campo, chairman and chief executive of Camden City Centre, a development of thousands of apartments in the Houston area. “We’re seeing higher rents, faster lease-ups, lower construction costs — everything you want to see. Part of it is there’s just a pent-up demand for new product because we didn’t build anything during the downturn.”

Residential rents increased 4.2 percent in 2011 on a national basis, and 3.6 percent so far this year, according to Axiometrics, an apartment market research firm.

Some in the sector now fear overbuilding, particularly with the surges in rent increases now starting to taper off.

“The real test is going to be what happens between now and April or May as we see all these new units introduced to the market,” says Jay Denton, Axiometrics vice president for research.

PositionRealty.com
Office: 480-213-5251

Small Commercial Building Sales Back to 2008 Levels

Trepp LLC is reporting that sales of small buildings nationwide have increased in 2012 to the highest level since 2008, with more and more buyers taking advantage of prices that have yet to rebound from the property boom going bust.

Broker Connie de la Garza has been trying to sell an empty medical-office building in Harlingen, Texas, for six months. He’s finally getting offers after slashing the asking price by 26 percent to $1.4 million.

“That’s when the real activity happened,” said de la Garza, the owner of Bahnman Realty Inc., who is marketing the property along with Brandon Beeson of Edge Realty Capital Markets. After two bids that were “absolutely ridiculous,” the third “is something that we can work with,” he said.

Increased access to financing has also played a significant role in the uptick. Improved demand is expected to help broaden a commercial real estate rebound that has so far been confined to trophy office buildings, apartment communities, and shopping malls.

Loans for properties valued at less than $1 million account for nearly 33 percent of commercial mortgages held by banks, notes Trepp researchers. Meanwhile, the sales volume for properties of less than $5 million soared 41 percent this past May from a year ago to $4 billion.

Of the 122 metro areas that Boxwood Means monitors, 88 registered year-over-year increases. Total volume for this year’s January-through-March period was $20.3 billion—the highest for that five-month period since ’08.

Finally, a Green Street Advisors Inc. index of commercial real estate values measuring REIT properties has climbed 53 percent from its 2009 low and is just 6 percent from its August 2007 peak. Ryan Severino, senior economist at Reis Inc., concludes, “There’s definitely not a lot of institutional money chasing those kinds of deals.”

PositionRealty.com
Office: 480-213-5251

Commercial Due Diligence: How to Find the Stuff You Need

Due diligence is extremely important, regardless of the type of property you’re thinking of buying. In development property and land deals, buyers start the fact-gathering process with their first encounter with the property and it continues until they either bail out of the deal or go to settlement.

Here’s a list of sources of information (people, places & things) that are good starting points if you’re trying to research a property.

Sales & Ownership Data

Tax assessor information is available in several forms. For every piece of data, there is a primary source. The primary source is likeliest to be the most accurate and current source of information. For real estate documents that are recorded, such as deeds, liens, restrictive covenants, easements and subdivision plans, the primary source is the actual record of filings maintained by the applicable governmental department as well as the documents themselves and the recording information shown on them. These are usually kept at the courthouse for the county in which the property is located (Recorder of Deeds or Tax Assessment Dept.). People usually use title insurance companies who send searchers to the various courthouses to look up records. The deed contains the legal description of the property, which sets forth the property’s actual dimensions.

You can also search in free or fee-based databases that allow you to get information on properties nationwide or in a particular geographic area, such as: http://www.searchsystems.net; http://www.realquest.com; http://www.brbpub.com/pubrecsites.asp. These are great tools as long as you remember a couple of things. They should never be used as a substitute for hands-on research and inspection if you need results that are current and absolutely accurate. No database, even a governmental one, is a primary source of information. The governmental database, however, may be the next best thing to the primary source depending on the manner in which it was created and the frequency with which it is updated. When title companies insure property title, they do not rely exclusively on databases. They send people to where the records are maintained to physically search them. Real estate appraisers do not just use databases. They conduct additional due diligence and physically inspect the properties involved.

For several reasons, the farther you move away from the primary source of information, the greater the likelihood that the information may not be current and accurate. There is the time factor. The information has to pass from the primary source down the line through other people or organizations. In addition, there is the “garbage in, garbage out” principle. The integrity of any database, governmental or not, hangs on the thoroughness and competence of the people responsible for compiling and maintaining it. Databases can save you a tremendous amount of time and effort. You can use them most effectively as screening tools and to gather information subject to confirmation and further research if the situation or property warrants it. In addition, they are invaluable in identifying contacts if you need additional details or clarification.

If you want to find out who owns the property but don’t know the address, one way to be able to identify the property is to go to the municipal building and look at the tax maps or tax plats of properties in the municipality. By process of elimination, you should be able to identify the property (thus giving you the owner name, address, parcel identifying number). It’s a good idea to take a copy of the tax map with you when you return to the property since this will help you to pinpoint its location by counting parcels on the map from intersecting streets or other landmarks, particularly if the property is vacant land. Again, be aware that some of the information in the database or on the tax maps may not be accurate, particularly the size & shape of parcel, zoning classification, and whether the property’s serviced by public utilities.

New Construction Communities

If you want to find out who is or will be building in an area, take one municipality at a time and get the list of approved subdivisions and land developments from the municipality (manager’s office, code enforcement or land development offices). Then you can visit the new construction sites, talk with the site agents and get brochures. If the jobs haven’t started yet, you can go to the builders’ websites for preview information.

Municipal Records

You can identify properties that have applied for rezoning or subdivision & land development approval by requesting a list from the municipality of the properties. After you decide which properties you want to investigate further, make an appointment to review the development files and plans at the municipal office. This is public information, and anyone is entitled to review materials relating to actions taken by a municipality in public meetings and hearings. This can be an excellent source of information on owners who may be thinking of selling their properties.

Utility Maps

Checking the street for manhole covers and hydrants won’t necessarily give you correct information about whether a property can be serviced by public water and sewer. Instead, consult the mapping available through the municipal or regional sewer & water authorities, county or regional planning commission and private water companies.

Zoning

Each municipality adopts a zoning ordinance and zoning map for the properties within its borders. This material is available for review or purchase at the municipal office or through private vendors. Always make sure you’re looking at the most current ordinance and map since these are amended periodically. In addition, read the whole ordinance and not just the section on the particular zoning classification because the ordinance contains provisions that apply across the board on issues like definitions of terms used, accessory uses & structures, signage, and minimum frontage requirements.

The zoning officer (a/k/a code enforcement officer) at the municipality is the one to whom you should direct your questions about the zoning ordinance or map or if you want to find out anything about a property that may have happened in the past, like granting of variances, special exceptions or conditional uses.

Proposed Highways & Facilities

Depending on the nature (federal, state, local), you can access information through the municipality, county/regional planning commission, municipal comprehensive or “master plan” and federal or state agencies.

Profile Data of Area or Municipality

Municipalities and county or regional land planning agencies prepare comprehensive or master plans as a primary tool for their land planning. These plans contain a wealth of information pulled from various sources including US Census Bureau, Dept. of Labor, US Dept. of Agriculture soil surveys, FEMA floodplain mapping. In addition, you’ll find data about natural resources, statistical data on housing stock and non-residential developments, existing and proposed roads, transportation facilities, utilities, plants, commercial operations, hospitals and schools. Be sure to check out the proposed land use map and accompanying text. Here you might find clues for future growth areas and even potential for successfully rezoning particular properties. The master plans are available at either the municipal office or the county/regional planning agency.

Floodplain Maps

To determine if the property is in an area subject to flooding, consult floodplain maps. These are available through either the municipality, county/regional land planning agencies, or FEMA (http://www.fema.gov).

Apartment Investing Basics: 6 Warning Signs of a Bad Deal

Phoenix multifamily properties are preferred by many investors as they bring in passive income (and its my favorite type of deals to do!). When buying Phoenix income properties, it is normally a longer-term investment, but you need to make sure your money is used in the right place. Below are a few factors that may help in deciding which property to invest in.

Buy an affordable property
One should always choose a income property they will be able to afford; it’s not just about being able to buy a piece of land. Investors calculate that the rent will be able to payoff the debt of the loan and provide extra money at the end of the month for their own pockets. Until a unit is rented out, the owner (that’s you!) has to pay the mortgage, so he or she should have enough monthly income to settle the payment. Apart from the mortgage, other expenses also need to be fished out from the owner’s pocket. One should have enough funds raised so an investment does not end up in a loss.

Neighborhood and surroundings
A good neighborhood ensures how soon a property goes on rent. As an investor, one should purchase a property in a safe and reputable neighborhood. Neighborhoods are generally categorized into A, A-,B+, B, B-, etc. properties Properties near colleges go on rent easily, as every season students enroll and they look for a cheap residence. The surroundings of the property should have all the basic amenities like schools, parks, shopping malls, supermarkets and so on. A property that is far away from these basic requirements might not be able to hold tenants for long.

Get the information
Get know-how of the area, and before signing the deal, visit the area for a few days and at different times. This way one will get to know about the area and the crowd that lives there. Getting information from those who already live there will be a deciding factor in the purchase.

6 Early Warning Signs of a Bad Deal

Your job as a real estate “rainmaker” is to find the deal and make it happen. Leave the building management and operations to others. The big money is made in the deal and that’s where your time is best spent.

Obviously you want to focus only on stellar deals. Forget the marginal ones. It takes just as much time to work on a deal that brings in peanuts as it does to lock down a deal that makes you wildly rich. There are 6 red flags that tell you quickly if a deal will be a time-waster. If you spot just one of these 6 warning signs, move on to the next potential property.

1. The Numbers Don’t Add Up
The bottom line is you want to make a lot of money. If the numbers don’t add up and the seller won’t drop the price, or you can’t get better terms, move on.

2. Missing Numbers.
If the seller can’t provide you with the year-to-date profit and loss statements, plus the actual numbers from the previous two years, move on to another deal.

3. Made-up Numbers.
Pro forma numbers are pure guesswork. They may be educated guesswork, but they are still a projection. Lenders won’t give these made-up numbers any weight and neither should you.

4. Troubled Property.
A property may look good on paper: The numbers are real and they add up. But a site visit paints a different picture. Major repairs are needed because the seller has been deferring the maintenance hoping to pass the headache on to the buyer. Don’t let it be you.

5. Wrong Area.
Don’t spend your money trying to reverse a trend. If the neighborhood is in decline, the property carries that stigma. Tenants will be moving on, and so should you.

6. Months on the Market.
Good properties go fast. Bad properties linger in the listings for month after month. With detective work you can figure out why it’s a dud. And that’s a viable learning experience. But your time will be better spent going after good deals.

You create a beautiful garden by getting rid of the weeds. It’s the same with building a real estate portfolio: you must quickly weed out the lousy candidates and focus only on the prime properties. There are a lot of apartment buildings for sale in Phoenix. Phoenix income properties will yield you the best returns for your investment portfolio. Give us a call TODAY!!

Apartments Best Commercial Investment For New Investors

I was asked the other day by a new investor what my favorite type of commercial property is to invest in. I like apartment buildings best. They are easy to find, easy to analyze, everyone needs a place to live, banks love to lend on them, and they’re great cash flow generators – especially now that prices and interest rates are down! In fact right now FNMA is offering 5.5% loans on apartment buildings!

For a new investor they are easy to analyze, manage, and easy to relate to. For an experienced investor they are straightforward to manage and you can set up business systems to automate and delegate the mundane day-to-day tasks of owning apartment buildings. Once one is started it is relatively simple to buy more and more apartment units and become a rich apartment building mogul.

Now is a great time to start. There are lots of great deals on apartment buildings because Buyers are sitting on the sidelines forcing sellers to be realistic about prices.

Properties are being bought on cash flow today based on current rents and occupancy – not on artificially high prices based upon hope of future appreciation or condo conversion. Buying at today’s low prices gives you positive cash flow from day one. That makes is a smart investment.

My advice to my new investor was to start off with apartment buildings. I recommended that he start by investing in small to medium-sized multi-unit properties (5 to 12 units) then work his way up to larger properties as he gained experience and a strong management team.

Go forth and Prosper.

Is Now A Good Time To Purchase Commercial Real Estate?

We have all driven down the street and seen a countless number of office and retail signs for lease. The Phoenix commercial real estate market has been hit just as hard as the residential markets. The down fall of the commercial real estate market was caused by the lack of consumer spending to support the businesses that occupied these space; therefore, Phoenix commercial property owners were unable to pay their mortgages due to the high vacancy rates. Unfortunately, these property owners purchased their properties at the height of the market and are unable to re-lease their properties at today’s lower lease rates and still be able to pay their mortgage payments.

Fortunately, for today’s commercial real estate investor they are able to purchase at a lower price and still be able to lease the property at the lower market lease rates. Yes, there is still a large supply of vacant spaces on the market but the smart investor can lease their spaces in a relatively short period of time by offering below market lease rates to potential tenants. If you are selling a commodity that is in demand lower than everyone else, then you will be able to sell it. Commercial real estate is no different!

Also, remember a commercial lease is a long term lease unlike an apartment building or single family home. It could take a few month to find a good tenant to occupy your office or retail space but you will also not have any turn-over for a few years. In addition, a good business owner will not want to relocate their business to another location too often because of the fear of losing potential or repeat customers.

Due to the low market lease rates, most investors will lease their space to a tenant on a two to three year lease instead of a 5 to 10 year lease with lease rate increases. This strategy is implemented so that they can increase their rates when the market improves. If the tenant is unable or willing to sign a new lease at the higher lease rate, then the investor can put the property back on the market at the higher lease rates.

Furthermore, a smart investor knows that when market lease rates increase, then the market value of their property also increases. Consumers are starting to spend more and more on good and services than over the last few years. In addition, the unemployment rate in Arizona is currently below the national average. Therefore, purchasing a commercial property at today’s prices is becoming more and more attractive. If you wait until the “Wall Street Journal” states purchasing commercial real estate is a smart investment, then it’s too late!!

Give us a call TODAY if you are considering purchasing Phoenix commercial properties.

Contact: Sean Heideman, Broker ~ Position Realty ~ 480-213-5251

Interested In Buying Commercial Real Estate?

When you are looking at a commercial real estate deal you will hear terms such as “Cash on Cash return”, “Net Operating Income” or “NOI” and “CAP Rate”.

If you are new to commercial real estate these terms may be foreign to you, so lets get you into the swing of things by teaching you one of the key real estate investing terms for commercial real estate.

CAP rate stands for “Capitalization Rate” and measures the return on an investment in a commercial building. The CAP rate can confuse a new investor because it ignores any debt on the property. That is helpful because it shows the return on the investment in an absolute sense and allows you to compare investment alternatives in different buildings without being confused by the financing on the property, which can muddy the analysis. CAP rate is NOT the same as cash flow, which would take into consideration mortgage payments.

CAP Rate is calculated by taking the income and deducting all expenses other than the mortgage, then dividing that into the purchase price. For example:

If you had rental income of $120,000 per year, expenses (other than mortgage interest) of $30,000 per year you would have $90,000 per year leftover. The expenses that you include are regular expenses like electric, gas and oil paid by the landlord as well as irregular expenses like periodic repairs and maintenance.

In the example above, if you paid one million dollars for the building and had annual cash flow after expenses other than mortgage interest of $90,000 then you would have a cash return of $90,000 on a million dollar investment – which would represent a nine percent return. ($90,000/$1,000,000 = 9%).

CAP rate is a good way to compare investment alternatives. The higher the CAP rate the better because a higher CAP rate refers to a higher return for you.

Retail priced properties have CAP rates that vary by area and type of property. CAP rates can be as low as 5% – for example a unit of Goldman Sachs is asking $42 million for the 250 Unit Palladium in Scottsdale Arizona – a beautiful class “A” apartment building in a hot rental market or CAP rates can exceed 10% for class “B” and “C” apartment buildings in less desirable cities and in older buildings.

In other classes of buildings that are also class “A” CAP rates can be higher. For example a Wells real estate partnership (REIT out of Georgia) is the 275,000 square foot Highland Landmark 3 in Downers Grove Illinois at a 7% CAP rate. That building is 97% occupied and is also a class “A” building having been built in 2000 and featuring modern system, aesthetics and functionality.

CAP rates are market and building type specific so you will need to learn your market by looking at asking prices, comparable selling prices and speaking with market participants (investors, bankers, brokers) to see what your market is like.

For most small investors your best purchases will be class “B” apartment buildings where CAP rates are at least 10%. You will note that a 10% return is MUCH higher than any bank will give you and probably the highest return on a safe investment that you can find today. That is, in a nutshell, why cash flow investing in apartment buildings and other commercial properties is so attractive.

Understanding Commercial Real Estate Investments

Purchasing commercial real estate as an investments is different than purchasing residential properties. The current or future income derived from the commercial building determines if the property is a good investment or not. Typically there are three commercial real estate investors that have different objectives; therefore, they will look at the building differently. The following are the three investment objectives an investor might consider:

  • Rehab Investors: This type of investor is looking for a property that is run down and is in need of repairs. They want to purchase the property at a low price, rehab the property and bring the property to full occupancy or with a low vacancy rate.
  • Management Investor: This type of investor purchases a property that currently has a decent occupancy rate and has little to no deferred maintenance. The currently owner is not running the property at it’s full occupancy due to poor management of the building. This investor will purchase the property and increases it’s cash flow by managing the property better than the previous owner.
  • Buy and Hold Investor: This type of investor will purchase a property that currently has a high occupancy rate and has no deferred maintenance. The investors watches the trends in the market and will purchase when he knows rental rates are low. Once the market rental rates increase the investor will raise the rates which will increase its value of the building.

Once an investor has located a commercial building to purchase based on location and price range, the investor will want to review the current financial history of the building to determine a pro-forma financial statement for the next year of operation. Also, the investor will want to determine what similar buildings (Class A, B or C) in a same condition are currently renting for in the market. Furthermore, an investor will want to determine a market cap rate base on what similar buildings recently sold for in the markets.

Most seller will try to inflate the income or deflate the expenses provided in the historical financial statements. You should request up to three years of historical financial so that you can determine any trends in income or expenses. If you are dealing with a “Mom and Pop” type of operation, then the historical financial statements might portray an inaccurate picture of the financial ability of the building. Furthermore, if the building is currently in foreclosure or owned by a bank, then the historical financials for the building might not be available.

If you are provided with any historical financials, then you will want to determine a trend in the income and expenses to use this information for your proforma. Also, you can obtain expense comparables from a real estate broker or appraiser that has data on the same property type you are purchasing. With the expense comparables you can determine if the expense for the building are higher or lower than other buildings and determine if there is room for improvement with the property once your purchase.

Next, you will want to survey similar property types in the area to determine a market rental rate for your building. If you are purchasing a multifamily property, then you will want to find similar buildings with the same number of bedrooms, bathrooms square footage, amenities, etc. If you are purchasing an office building or retail property, then you will want to determine a rental rate based on price per square foot and with similar lease types (Full service, Gross, percentage, modified gross, etc.).

The final step is to determine a market cap rate that you should use for the valuation of your building. Of course you will have your own cap rate (yield rate) that you desire but if you know what similar buildings are selling for, then you will have more negotiation room with the seller. To determine a market cap rate you will find similar buildings that sold and compile the cap rates from those buildings to determine your market cap rate. You should have about four to five arms length comparable sales for this analysis.

Once you have compiled all of this information, then you are ready to determine a market value for the property you intend to purchase and to start preparing your offer to the seller. If you and the seller are unable to come to an agreement on a purchase price, then you will repeat the process with your next offer.

Also, before you submit your offer you will want to determine if the property will meet your investment objectives. Some most common investment ratios a investor will consider are as follows:

  • Cash on Cash Return = Annual Before Tax Cash Flow / Cash Down Payment
  • Rate of Return = Annual Before Tax Cash Flow / Purchase Price
  • Gross Rent Multiplier = Purchase Price / Annual Before Tax Cash Flow
  • Internal Rate of Return = This calculation is used for larger buildings or more sophisticated investors. Here it the definition: The internal rate of return on an investment is the “annualized effective compounded return rate” or “rate of return” that makes the net present value (NPV as NET*1/(1+IRR)^year) of all cash flows (both positive and negative) from a particular investment equal to zero.

If you are interested in purchasing commercial real estate investments, then we can help you determine a fair market value and with all the investment ratios. Contact us TODAY!!

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