An industry service from the Real Estate CyberSpace Society!
Okay, so in my last blog I spoke of the value of common sense in real estate investing. And as promised here is my humble opinion on how to employ that common sense in the world of commercial real estate investing.
Before even looking at a single building, sit down with a professional REALTOR® to review your portfolio and your goals. A true professional will take the time to understand where you are and where you want to be. And you might just find out that you aren't where you should be. Real estate, expecially commercial real estate, is a GET RICH SLOW scheme. But if you follow a few simple rules of thumb, it never ever fails. You will get rich, you will win the lottery, you will find the holy grail...just give it enough time and planning. To me, more important than the financial rewards is the freedom you will gain.
Okay, probably the most important point for the real estate investor to consider is patience, good old fashioned patience. Commercial real estate investments are very complex and very costly to mess up. You can make a huge mistake buying a used car and your world won't come crashing down, but just mess up a five million dollar building purchase and you are in it deep. That can bleed you dry in no time.
When purchasing a commercial building, it is important to review every possible document. Review five years worth of financials (I'm talking investors, not users - for users, the building features are the most important). And try to get financials prepared by an accountant. Owners financials are pretty much useless. Even if you get accountant prepared financials you must check the "Notice to Reader". Many owners just provide documents to their accountants and have the accountant prepare them. This is much less reliable than audited statements, but unfortunately is all most of us ever get. No problem, between your accountant and your commercial REALTOR®, you should be able to make some sense of them. A good commercial REALTOR® who practices in the investment marketplace (not to be confused with an agent. Many commercial agents are not members of the Canadian Real Estate Association and are not REALTORS®) should have good financial statement knowledge and good knowledge of what kinds of income and expense items are "normal" for different types of buildings.
When reviewing financials, your REALTOR® should help create a new set of financials predicting the next five years income. This is more important than reviewing the last five year. In all honesty, you could really buy a building without looking at the owner's financials if you have a knowledgeable agent who can help you accurately predict future income and expenses. Today is a very good example of this. Almost NOBODY will receive the same income in the coming five years as they did in the last five years.
Have a hard look at the age of the building, and what kind of maintenance it has received in its lifetime. A good owner will have detailed records of major repairs and maintenance. Sometimes a building that is producing great income on paper has not had proper maintenance. It is not unheard of for an owner to neglect maintenance for 2 or 3 years if they plan on selling a building. This makes the net income higher, and may fool someone into paying more for that income.
There are too many parts of due diligence to discuss in a single blog but hopefully this gives you an idea. Other things to consider are environmental, location, vacancy risk, worst case scenario, cash flow projections, management, and more.
As a final point to this blog, do not EVER EVER buy a building under pressure or on emotion. If you find yourself starting to like a building so much you are discounting the red flags, take a step back and remember there is a bus every twenty minutes, and a building every forty.