Real Estate Realities
LOS ANGELES—A recession has its up sides and down sides. So when it comes to investing in real estate, there’s definitely an upside for the potential buyer. And for those seeking commercial real estate, whether it’s an apartment building, retail or office space, now is the time to buy.
Finding a suitable commercial building is no easy task, but the fact that there are some areas with high inventory in that segment with motivated sellers, gives you, the buyer, an opportunity to make a solid investment for your future. Commercial real estate can be especially profitable, but not for the squeamish so do your research and if you already own commercial real estate, you know the drill, so to speak. And if you’re a novice, find someone who has gone through the process and is experienced enough to offer you advice and help guide you.
It’s often said that commercial real estate is made for the sophisticated investor. And it’s true so do as much research as possible to help you determine whether it is right for you. Location is very important, as we all know, so be mindful of that when you visit a property. If a building is located too close to a freeway on ramp, for instance, where traffic gridlocks during rush hour, leaving potential customers unable to access the building, it can be a deal breaker since it cuts into potential revenue for your tenants and for you if they go under or leave altogether.
As part of your research you’ll get a lot of useful information from the seller, especially about revenue, taxes, expenses and so on. So it’s important to ask for the actual numbers or a Schedule E from last year’s income tax report where the figures are broken down into their proper categories.
Financing requirements for commercial properties is also a little different than if you were to buy a home. A buyer is required to put a minimum of 35 percent down instead of 3.5 percent required to buy a single family home. The reason is that the loans tend to be much larger and the risk is higher for banks who want to ensure their investment will be sound.
On a given day, you may drive around any main drag and you’ll see lots of retail buildings sitting vacant and seemingly for sale. While many are in the market, many others are not as part of a greater strategy by their owners who are betting on an upturn in real estate. In Santa Monica, for instance, there are a number of commercial buildings along a major street that are vacant since their owners are unwilling to lower the rents to attract tenants. By lowering rents, they would be forced to lower rents on their other properties resulting in an overall revenue drop for the building owner. So it makes sense to keep the buildings vacant even if they are losing money.
It also makes sense to find out if a property has a revolving door of tenants coming and going. It’s often a sign that the rents are too high and that the location may also be an issue.
Refurbishing and upgrading costs are also higher for commercial properties since building and safety codes are more stringent for commercial buildings versus single family homes due to the fact the general public would be using the facility in large numbers. So if major repairs are required, be sure to find out just how much they will cost before taking the plunge.
Oftentimes, you can add value to a building with a needed facade repair, upgrade or some cosmetic changes that will draw tenants and customers alike. In these instances, the upgrade will work wonders for your bottom line.
These days with bad news coming out of many segments of the economy, it’s good to know that real estate can still offer great value and a great investment opportunity.
David Rosenfeld is a Real Estate broker and president of Advantage Real Estate, a Real Estate and investment firm in Santa Monica, and a Rotary Club member. He has more than 20 years experience in commercial and residential property investments and financial counseling. He can be reached at 310 450-4488 and at firstname.lastname@example.org.
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