Commercial Industrial Condo (newbie question)

[babyblueflame]

Hello Everyone,

I`m very green in real estate investing. Although I have read numerous books, attended seminars on due diligence and everything else...I am still not confident enough to go out and say that I can forsee all the problem areas. I understand that one way of learning is through making mistakes, but I am here today asking for all you nice and experienced investors to advise me on what to look for as pitfalls.

The building that I`m looking at is located in a very industrial area in Markham Ontario. It`s an end unit of a major plaza. 4 units fully occupied by tenants. with gross income of $39,000 asking price is $354,900.

What I understand about the commercial investments are the legal fees as well as appraisal fees, downpayment ect...the upfront fees are a lot higher than residential properties. Are there anything else that I should be careful about? Any regulations or anything like that?

Any advice would be helpful...Thank you so much in advance!

Special thanks to Todor for being so nice and informative!

Rosemary

 

[babyblueflame]

could someone please post some ideas?

 

[invst4profit]

Look very closely into expenses. Commercial properties value is based on NOI (income after expenses).
I am not experienced on what type of cap rate is reasonable on a property such as this but I am sure someone will chime in that does know. Try this site if you do not get enough info here.

http://forums.canadianbusiness.com/index.jspa (Canadian)
or
http://www.biggerpockets.com/forums/ (American)
or
http://www.creonline.com/index.html (American)

On the surface this property appeares to be over priced.

 

[babyblueflame]

Thanks for the links. The price is still negotiable, but with today`s economy, is it ideal to still invest in commercial buildings? Vacancies will be a killer for these deals...it`s not like residential, and it`s definitely not a necessity. Please post more opinions...thank yoU!

 

[brentdavies]

Commerical properties has a lot of hidden potholes. I will try to outline a few.

1. Leases of the existing tenants. Commerical leases are usually 40 pages and the most important details are hidden in the first 6 pages or the last 4 pages. Look for term of lease- how long. Renewal options. Free rent. Tenant improvement allowances. Are the leases gross leases or triple net or a variation thereof. Is the storage area at the back of property included in the tenant`s lease. Are the existing tenants of a similar type or is one the tenant conflicting with the others. One Location we rented was next to coffee supplier, who roasted the coffee every second day. ( We said he burnt the coffee). We did not renew the lease and moved.

2. Environmental concerns. Your mortgage company will demand an environmental assessment on the site. Are any of the tenants currently using a chemical process that can leave a contanimated site. Corner gas bars are the most common culprit.

3. What is competing commerical space leasing for? Is there room for moveing the rents up at renewal time. What incentives are other landlords giving away. A 5 year lease, means no increases during that time.

Commerical tenants are great to deal with as they are business people, who understand paying bills and acting responsible, unlike some residential tenants.

Good Luck

 

[babyblueflame]

thank you very much Brent, the above has opened my thoughts a bit...I`ll keep on doing my due diligence!

 

[Thomas Beyer]

QUOTE (brentdavies @ Oct 4 2008, 04:07 PM) Commerical properties has a lot of hidden potholes. I will try to outline a few.

1. Leases of the existing tenants. Commerical leases are usually 40 pages and the most important details are hidden in the first 6 pages or the last 4 pages. Look for term of lease- how long. Renewal options. Free rent. Tenant improvement allowances. Are the leases gross leases or triple net or a variation thereof. Is the storage area at the back of property included in the tenant`s lease. Are the existing tenants of a similar type or is one the tenant conflicting with the others. One Location we rented was next to coffee supplier, who roasted the coffee every second day. ( We said he burnt the coffee). We did not renew the lease and moved.

2. Environmental concerns. Your mortgage company will demand an environmental assessment on the site. Are any of the tenants currently using a chemical process that can leave a contanimated site. Corner gas bars are the most common culprit.

3. What is competing commerical space leasing for? Is there room for moveing the rents up at renewal time. What incentives are other landlords giving away. A 5 year lease, means no increases during that time.

Commerical tenants are great to deal with as they are business people, who understand paying bills and acting responsible, unlike some residential tenants.

Good Luck

I`d like to add

4) understand expenses that you pay and what the tenant pays

5) a 10% NET yield for a small industrial condo is decent (but not great) IF indeed it is true after all costs !! if it is gross and you pay any costs it is not great, i.e. you pay too much

6) many unethical players (sellers and also tenants) in this industrial space .. be extremely careful about legal contracts and its enforcement .. for example: what will you do if the tenant does not pay ? what will you do if there is property damage ? are you financially, mentally and legally prepared for an eviction or fix up costs ?

7) is there a personal guarantee by tenant`s president ?

8) very hard right now to get a mortgage .. maybe 50% loan-to-value around 8-15% interest .. likely none for you as a novice !! hence a cash purchase !

Consider educating yourself further, or buy a residential condo or small apartment building, or buy a commercial REIT with better yields and more liquidity !

 

[Nir]

Rosemary,

Based on the limited information provided it seems that the property`s CAP is not even higher than a commercial mortgage interest ----> negative cash flow ---> do NOT buy! honestly, it performs terribly if purchased for the price mentioned within +-10%.

Glad if I could help,
Neil

 

[babyblueflame]

wow, thank you so much Thomas and Neil...I will keep on searching and find better deals soon...and after I do that, I`ll post them on this site and ask for your opinions again!