Investing in Commercial Properties 101

If so far you’ve invested only in single unit residential properties, stepping out of your comfort zone, into commercial properties, can be a startling experience.  However, like anything else once you accomplish something, it gets a bit easier after each time.  Same goes for commercial investing.  It seems intimidating at first, but it’s like any other type of investment.  It requires due diligence, proper management, and a full understanding of all the figures.  Once you can fathom the idea of owning multiple units, everything else is straight forward.  If you are debating whether to invest in commercial real estate, here are some facts that may help you to decide.

What is a Commercial Property? A commercial property is any property over four units. It could span from a five unit varied use property to a 100-unit apartment complex. It could be a 20-unit mobile home complex or a small strip mall. If you invest in anything over four units, you are considered a commercial property investor. What makes commercial properties distinctive are the numerous income flows they provide. Instead of collecting rent from one tenant, you have multiple checks to collect. It sounds intimidating to jump from one tenant to ten, but it is often much easier than realized.

Economies of Scale: The idea of economies of scale is one of the reasons that the additional units are not really overwhelming. There may be ten different tenants, but the physical property remains the same. A single family property has one roof, one front yard and one living room. A five unit property still only has one roof and one front yard, so ultimately you are getting more for your purchase dollar. And management wise, you still only have one physical complex to worry about.

Vacancy Rates: There is a perception that dealing with multiple tenants is a nightmare when it comes to collecting rent, but the opposite is the case. With a single family property, if the tenant doesn’t pay, there is no income coming in and the property is inefficient. With a commercial property, there are multiple tenants paying rent, so one vacancy does not totally disrupt your business. Rent collection may be more consuming, but it is worth it to protect against a vacancy.

Increased Financing Options: Another perception is that it is extremely difficult to get financing for a commercial property. In reality there are many commercial financing options, including a handful of no income or limited documentation lender financing options. There are several commercial long programs aside from traditional lending. Banks as well as private lenders are attracted to large commercial projects, making it easier to find financing for these types of deals than small single family homes.

High Upside: When purchasing a single residential unit you are at the mercy of similar sales in the area. However, with a commercial property, comparable sales are not as significant. The property is evaluated based on the income it produces. An apartment complex with no vacancies is more valuable than what the market may indicate. Due to this, there is potential for higher appreciation. With the right commercial property, there can be a higher upside. There may be risk but the rewards are frequently much greater.

Instant Equity/Increased Cash Flow: A down payment on a commercial property can be anywhere from 25-40%, depending on the lender. This may hurt but the rewards are not far. You have instant equity from the first month you own a commercial property. With this equity comes the ability to generate a greater cash flow, which can be used to generate additional properties or make improvements on the property. Whatever you decide to do increased cash flow, this fact makes commercial properties an attractive investment.

Decreased Competition: The demand for commercial property is not as high as with single unit residents. There are less investors who have the means or desire to purchase these kinds of properties; therefor there is an advantage against your competition. You can take your time choosing and purchasing properties that you see value in without having to race against a bank levied deadline. You could end up sealing more deals on properties you actually want.

Commercial properties can be a great addition and while they may not be for every, these opportunities shouldn’t be blindly ignored on predetermined notions.

10 Things to Know about Commercial Real Estate Appraisal

These days, when it comes to the subject of commercial real estate, business owners and investors have a lot to absorb. This is multiplied greatly when it comes to obtaining an appraisal on a piece of commercial real estate, a process that can greatly differ from appraisals done for residential properties. According to expert mortgage lenders most of the value derived from a commercial building is based on the rental rates received, relative to the expenses that are paid out. The underlying asset is important, but not even close to the way that a residential property values assets.

According to Douglas McKnight, a veteran commercial real estate appraiser, there are 10 crucial facts you need to know about commercial real estate appraisals. Whether you want to buy or sell a commercial property or you just want to establish a value of a lease or lodge a property tax appeal, these facts will help you to know what to expect.

1.The Inspection Is Only a Small Part of the Appraisal Process

Depending on the size and complexity of the property to be appraised, it might take less than an hour to several hours to inspect the property. Some clients perceive this as the entire process but the truth is that it is just the beginning. Appraisers research public ownership and zoning records, investigate demographic and lifestyle information, and compile comparable sales, replacement costs, and rentals. They then analyze this information as it relates to the value of the property. Finally, they write a report on their findings. The inspection is just the beginning of an appraisal process that may take several days or even weeks.

2. Don’t Try to Misrepresent the Facts

Appraisers are expert skeptics. They will request to verify anything that you tell them from other sources. They may even ask questions that they already know the answer to simply to test the credibility of the people showing him the property. Appraisers constantly think about how they will defend their opinions if they are brought to court, even in positions where litigation appears unlikely. If you misrepresent any facts, the appraiser will automatically discount your credibility.

3. Don’t Withhold Information

You may be asked to provide a property tax bill, a set of drawings of the property, income statements, and other items. You may not know why the appraiser is requesting certain items, but it is best to provide whatever you can. The more you provide, the faster they can complete the assignment. Afterwards, if you dispute the appraiser’s value opinions and produce additional information that wasn’t provided from the get go, you have lost valuable time.

4. Appraisers Must Adhere to a Strict Code of Ethics

Appraisers are obligated to follow the Uniform Standards of Professional Appraisal Practice, which requires them to furnish an unbiased opinion. Failure to abide by this may result in disciplinary action from the state, including revocation of an appraiser’s certification. So if an appraiser refuses to do something you ask, it is possibly because of the requirement to obey these ethics.

5. The Client Is the Party That Orders the Appraisal

If the purpose for the appraisal is for financing, the lender is the client, and therefore orders the appraisal. Appraisers have an obligation to maintain client confidentiality. So the appraiser cannot release the appraisal report or any other confidential information to you, when you are the borrower. If the purpose is to appeal property tax rates the appraiser won’t release the results to the property tax board without your permission. So if you are afraid that the appraised value might be higher than the assessed value, you can rest assured that the appraisal is confidential.

6. Identify the Intended Users

Ensure the appraiser knows who you want to use the report. If you are buying a property, that could mean you plan to share the appraisal with the seller, your lender and possibly your local property tax appeal board. These parties will be made known in the appraisal report and are the only ones who are authorized to use the report.

7.There Are Three Types of Reports

A “restricted use report” can only be used by the client and is the shortest and least costly type. Fees vary based on the size of the property and the scope of the appraisal, but a starting point may be $2000 to $2,500. A “summary report” summarizes the data and analysis and can be used by any intended user and can cost upwards of $3,000. A “self-contained report” contains all of the details of the data and analysis, but is rarely requested. The appraiser can guide you as to what type of report you will need.

8. The Type of Report Is Separate from the Scope of Work

The type of appraisal is not based on the amount of work involved in reaching conclusions. With a restricted use or summary appraisal, the appraiser will accumulate huge amounts of information that are maintained in a work file but not included in these types of reports. Consequently, the differences in fees between the three types of reports are less than the amount of information each of them contains. So the same amount of work is done for all types of reports, the difference is what is included..

9.Consider the Date of Valuation

Instituting the date of valuation is imperative. Appraisers can appraise property as of the date of inspection, as of a past date called a “retrospective appraisal”, or as of a future date called a “prospective appraisal”. It is important that you establish the correct date of valuation for your needs.

10. Consider the “Property Interest” Appraised

Property interest refers to what your interest in the property is. Let’s say you want to know what a warehouse property is worth free and clear because you will be moving your business into it; here you are interested in what’s called the “fee simple interest.” You simply want to know the value of the building and its property. Now, let’s say you want to know what a property is worth to a landlord when occupied by particular tenants, here you have a “leased fee interest.” Finally, let’s say you want to know what a lease is worth to a tenant, so here you have a “leasehold interest.” This is a common request when looking to buy businesses since the value of the lease is to that business needs to be known.

 

5 Ways to Maximize the Value of Your Building Investment

 

Whether your project is commercial, residential, or retail; it is always a good idea to do your research and put the proper context in place to make sure you can retrieve as much of your capital as possible when and if the time comes for you to rent or sell.

1.Let your budget be your guide.

The most important document you will create and reference is your budget. Blueprints and building plans are important, but your budget will direct your site selection, floor plan, finishing materials, and landscaping choices. If building an investment property, your budget should also include a contractor which can help direct the conversation so that you consider all angles and make the most knowledgeable choices. The experts at Maxx Builders and Designers would be glad to help with this.

2.Looks are important, but they aren’t everything.

It is true that a building’s visual aesthetic plays an important part in its marketability. A building’s curb appeal, exterior materials, parking, interior and exterior design ambiance, all play a role in how appealing it will be to the next purchaser or rent tenant. This is significant for both residential owners and commercial investors. A building’s form and function are equally important, but ultimately function will always win. This is where the design team at Maxx Builders and Designers will come in to help make the space as efficient as possible.

3.Don’t underestimate the location.

A building’s location makes an immense difference in how attractive it is to buyers and to customers. As an investor, this is one of the most important decisions you will make. If you aren’t sure what to look for when selecting a site, obtain the help of one of our experts at Maxx Builders.

4.Don’t fall victim to the most common pitfall.

Often investors head directly to an architectural designer for their building design needs. However, an architect’s expertise is in design and not construction cost. So it is important to also have a contractor to help facilitate and guide the design conversation. At Maxx Builders and Designers, our team consists of both construction and design specialists that will mediate the process, helping you choose the unique design elements you love while staying within the business plan of the investment.

5.Use your resources.

When you gather a team of expert contractors, engineers, architects, and real estate agents together, you are certain to make knowledgeable, secure decisions from the beginning.

So when you’re ready to build, Maxx Builders and Designers are ready to join your team. Contact us today to see how we can make your building project one that will work for you.

 

Factors that Influence the Cost of a Project

Construction of a new building structure is a complicated investment requiring careful consideration of many factors. Primarily, an investor must determine the structure’s purpose, function, and use. Building different structures have different needs, and different needs come at different costs. When evaluating the expected costs of building a new structure or using an existing one, it is critical to consider the many need-based factors that could influence this decision. When considering the potential expense of your investment, contemplate the following three questions:

What do you need accomplished in the building? What are you doing inside?
When it comes to your business, the building is merely a shell. What’s truly significant is what’s happening on the inside. The main objective l for any commercial construction project is to maximize the efficiency and effectiveness of what happens inside the building. Certainly, the process and materials used to maximize the efficiency of a high-tech medical clinic will be very different than the process and materials used to maximize the efficiency of a storage warehouse. The process and materials used for one will require different costs than the process and materials of another.

The solution to maximizing the return on your investment is to systematically understand and layout all internal operations. Ultimately, what really matters is balancing the efficiency and environment within the building, to the cost of the building’s construction.  This way, you can decide what materials and construction processes are best suited to your project and which will help you find the best value. Focusing too heavily on the cost may come at the expense of productivity and durability, which could essentially be costlier in the long run. For example, a building’s interior may not facilitate maximum efficiency, and the business may incur high maintenance costs or a loss in time or productivity in the future. Saving money in the short term through lower construction costs doesn’t automatically yield lower business costs, in fact, it could actually lead to higher costs and render the building a poor investment.

Does the appearance of the building impact the business? Is it a sales tool?
Even though buildings are just shells in the business realm, to some businesses it is important to have an appealing shell. The exterior charm can be crucial for some businesses to draw in customers. For other businesses, it could be entirely irrelevant. Online retailers, for example, may not have any regard for how their building looks. A simple, plain exterior would be just as effective as an extravagant, charming one at maximizing productivity and efficiency for such a company. However, for retailers that sell their products from their building exterior appeal is very important. Their efficiency can only be maximized if their exterior draws in customers. So walk-in retail businesses would have to invest more in the appearance of their shell than an online retailer would.

What are the site conditions?
Not all sites are identical. Sites can differ in soil types, incline, and regulation among many other things. Building on certain kinds of soil can be much more expensive than building on others. Also, building on a steep slope will require more landscaping costs than building on a level terrain. Additionally, some areas have aesthetic requirements, where the exterior of the building must be of a certain material (brick or stone) for the building to be located there.

We conclude that It is impossible for any contractor to accurately predict the costs of a commercial construction project without understanding the building’s functional and locational needs, and their implications. Attempting to do this would be harmful to investors and could have long-lasting negative financial implications. Once you have taken the time to compile a plan for your facility that incorporates these factors, contact us at estimating@maxxbuilders.com to receive a preliminary estimate regarding the cost of your prospective building. The design, construction, and permitting experts at Maxx Builders and Designers would be glad to help you.

WHAT IS THE LAND DUE DILIGENCE PROCESS?

Anyone planning to develop a commercial property will immediately realize that commercial projects involve navigating a complicated maze of regulations. Before purchasing land or beginning construction on a commercial project there are numerous significant details and issues that need to be thought through and prepared.

This preparation process is referred to as the Land Due Diligence process will help determine the potential of a property and will save money from costly construction costs and changes that would have to be made to correct issues. At Maxx Builders and Designers, our expert team of builders and engineers strive to make this process efficient and simple for our clients, from beginning to end. Our consulting services maximize the efficiency of the building process by solving any permit or design problems.

Conducting proper due diligence evaluations Some of the steps for due diligence include:

Determining the usable square footage of the property to establish how much land the city may require for street widening, utilities, or expansion. This also accounts for how much of the property is unusable due to grade or water issues, land required for easements, configuration of land, and landscaping and green area requirements.

Obtaining proper zoning and planning designation for the use your property requires. it’s important to get your property rezoned or make the required changes to the planning designation. This is a difficult process that requires expertise from a consultant who is knowledgeable about zoning requirements.

Determining off-site development costs include the costs incurred by a landowner who is building on their own property, but is required to solve certain municipal matters before obtaining a building permit or certificate of occupancy. Off-site development costs can be very expensive. Usually the local municipality will declare that a street running adjacent to a property will need to be widened and the property owner will need to pay a portion of these costs. Another issue may be utilities that are located far from the property. In this case, the property owner is responsible for paying these costs too.

Conducting soil testing, which is required to determine the type of structural foundation required for the given soil’s weight bearing capacity. This information is gathered by a structural or architectural engineer who can then establish the building costs.

Obtaining a title commitment from a title insurance company providing any exceptions to the title that would limit the use of the property. Title issues can be one of the most frustrating parts of land development if handled improperly.

Conducting environmental testing, which requires a special certification and compliance. When it comes to environmental testing, the first stage is usually a Phase 1 Environmental audit. If the property is tested with only minor issues, one phase of testing is adequate. Otherwise, a Phase 2 audit is required to govern what would be required to make the property in compliance with environmental laws.

Evaluating the impact on the property valuation is typically a subjective matter. The ways that a building project could be valued may vary widely. Consulting with a real estate appraiser or broker can help property owners save equity dollars when negotiating the term of their loan.

Our team at Maxx Builders and Designers understands that this is a complex process; and we’re happy to offer our consulting services for land due diligence to help solve permitting and design problems with your next commercial project. Our Maxx consultants have the expertise and knowledge to proficiently structure your building process, assure a cost efficient design, and accurately navigate the maze of regulation.

Don’t do it alone, contact us today to schedule a courtesy consultation.