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Example: Commercial Properties Deal

So the question is, how do you go about purchasing a commercial property as an investment? We're here to help, take a look at the example below. Here's an example of a commercial property purchased as an investment property.


This commercial property is touted by some of the tenants with long term leases: Starbucks/FedEx/Kinko's/Bank Drive Thru's
Location: Atlanta, GA

Atlanta MSA, Double Drive Thru Center, New construction, 70% Credit, Kinko's, T Mobile, Starbucks, Associated Credit, Play N Trade. Starbucks & Associated Credit Drive Thru's, with new 10 yr leases. Escalations with all leases. One space left to lease. Developer will manage for free for a year if closing by 5/30/08.

Price: $4,600,000
Cap Rate: 7.00%
Occupancy: 80%

Cap rate (x100 to express as a percentage) = Net Operating Income/Market Value

Estimated Market Value = Net Operating Income/Cap rate

Net operating income = $322,000 ($4,600,000 x .07)

So in this case we would have to gather more data, gather the exact lease contracts and see what these tenants are paying. Then, you can determine your net operating income and possible future income if you have no vacancies.

And, you'll need to bring in some partners to come up with a down payment. If you haven't assembled a team already, if you're going to buy a commercial property at a price like this, you'll need a team who can help you gather capital to buy a property of this size and at this price.

In this case, perhaps you partner with a few of the other tenants to purchase the commercial space and then rent out the remaining units. However, there's more risk in this case if you don't have a past relationship to base your partnership upon. Here you're going in a bit blind in buying a property with people you haven't bought properties with before.

Also, sometimes commercial property owners will share in the revenue earnings of some of their tenants. This is another way you can run the property, take a lower lease or rental agreement and offset that will potential earnings.

Rough Numbers:
Down payment:
Loan amount:
Property tax rate:
Expenses: % of gross earnings
Appreciation:

Loan amount:
Interest rate:
Loan term:
Annual tax:
Annual insurance:

Monthly Principal + Interest:
Monthly tax:
Monthly insurance:
Total monthly payment:

Interest payment per year:
Mortgage payments for the year:
Principal payments for the year:
Per year appreciation growth:

Gross income:
Operating expenses (managing property, landscaping, insurance, property taxes, painting - there are fixed and variable expenses):
Loan payments:
Cash flow =

Link

Keys: It's all about the tenant, that could nearly as important and as true as it's all about location, location, location in real estate. But with commercial property this is especially true, a tenant and a long term lease will give you the owner much more leverage. Try to find commercial properties where the tenants have long term leases and their businesses are doing well. Sure, everybody is looking for these types of deals, but if you're doing your research and your contacts know what you're looking for, luck might just come your way.

Commerical properties can give the owner more freedom and less management duties, especially if the tenant is on a triple net lease. Where the tenant pays taxes, insurance, and maintenance--along with rent.

Remember: Use a commecial loan officer, and someone who's had experience buying and selling commercial properties.



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