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5 Steps to Find Your Next Commercial Real Estate Investment

Develop your selection criteria and invest with profit in mind

When it comes to finding the perfect commercial real estate investment, there are a lot of factors to account for, including your financial goals, your budget, your location, your risk tolerance, and a variety of other considerations.

You’ll also want to factor in the specific neighborhood of a potential investment, it’s square footage, the size of the lot, the condition of property (and the cost of any necessary renovations or repairs), the number of units or potential units, the cap rate, the potential cash flow, and the potential for future appreciation. Once you consider and develop a list of your specific requirements for each of these factors, you can use them as a ‘filter’ to eliminate properties that don’t fit your specific preferences.

Keep in mind that when looking for a property, the amount you pay is likely to be the most important gauge of whether the investment ends up being profitable in the long run. An investor can do everything right, but if they initially overpay on a commercial real estate investment, they have significantly less chance of making money from it. Conversely, if an investor finds an amazing deal, it will be much easier for them to weather unexpected surprises like vacancies or serious repairs while still turning a decent profit.

1. Do in-depth research

After developing a basic concept of what type of commercial real estate properties you’d like to consider purchasing, and your pricing and profit parameters, it’s time to begin initial research. Much like when looking for homes and residential properties, there are many options available in the South Florida area online that can narrow your search and help you get a feel for the market.

2. Use “The 50% Rule” to help estimate potential operating expenses

The 50% rule states that 50% of your rental income will be spent on property and business operating expenses not including your mortgage payment. These might include vacancies, taxes, repairs, fines, insurance, management, and other unforeseen types of costs that may occur.

To get an estimate just how much profit you may be able to get from a commercial real estate investment, divide your estimated rental income by two, and then subtract mortgage costs. Whatever is left over is likely to be a good estimate of your monthly profit.

3. Use “The 2% Rule” to estimate potential rent requirements

The 2% rule states that monthly rents should add up to 2% of the purchase price of a property. Therefore, it’s important to research local rent prices to ensure that they aren’t significantly lower than 2% of the property’s purchase price. While it may be difficult to get 2% in some areas and neighborhoods, as long as potential rents are close to this, the property is likely to have good investment potential.

Keep in mind that both the 50% rule and the 2% rule are simply good estimating tools – and you should run through all potential costs of a property with a trusted accountant, financial advisor, or real estate specialist before making any decisions.

4. Investigate properties in person

No matter how good a property looks in paper or online, it’s essential to visit a property in person to make sure there are no hidden problems or issues. A property might look like a great investment from afar, only to have issues with insects, mold, water lines, gas line leaks, asbestos, or other serious issues that may not be apparent until a close inspection is conducted.

Sometimes, a problem with a property may be what’s being developed nearby – and if a highway, prison, noisy factory, or a toxic waste-producing facility is being constructed nearby, it could seriously lower its value, along with any potential rents you might receive if you decide to purchase it. Of course, you can often find information on the area nearby the property from Google Maps or other resources, but it’s still a good idea to check in person – as you might not be able to view any construction projects that have been started recently.

5. Consult with lawyers, financial advisors, and real estate experts for advice

After looking at your investment needs and analyzing properties, you think you’ve finally found the perfect match. But you should wait a bit before making a final decision. Especially if the project is large or will require a large amount of your capital to purchase, you’ll want to get some outside opinions to make sure that there are no unknown legal or financial problems with the property.

Specifically, you want to hire a lawyer to check out the property’s legal history and to ensure that the seller is legitimate and actually owns the title, and the title is clean. You should also speak to an accountant and a real estate broker/consultant who can give you expert advice on the potential profits and costs you may incur by purchasing. Finally, if you’re unsure of the true value of the property and want further clarification, you may want to hire an appraiser to inspect the property.

When it comes to investing in commercial real estate, preparation is key

If you’re thinking of investing in commercial real estate, it pays to do your homework. Purchasing a piece of commercial real estate is like purchasing a business – so it’s essential that you pay a good price, calculate all potential profits and expenses in-depth, and strive to avoid any costly, unexpected surprises.

At Morris Southeast Group, we pride ourselves on understanding the ins and outs of commercial real estate investing; and we can provide you the expertise to make good choices when it comes to choosing, managing, upgrading, or selling your investments. To learn more about commercial real estate investing in South Florida, contact our team today at 954.474.1776, reach Ken Morris on his cell at 954.240.4400, or email kenmorris@morrissegroup.com for a free consultation.

5 Things to Include in a Good CRE Lease

What to look out for as you negotiate a commercial real estate lease

The process of negotiating a commercial lease can be extensive and exhausting, with several hazards to avoid. But a prospective tenant who has a basic understanding of the agreement and what they want in their lease has a great deal of leverage. It’s important to remember that when it comes to finalizing a CRE lease, everything is negotiable.

1. Detailed expenses

Landlords typically look to pass on expenses to their tenants. In a triple net (NNN) lease, the landlord will bill separately for taxes, insurance, or common area maintenance (CAM). A prospective tenant should pay special attention to which expenses your landlord expects you to be responsible for, especially as part of CAM. Since CAM is broadly defined, a landlord can include virtually any operating expense within this line item.

While negotiating a lease, you reserve the right to review the expense budget yourself, as well as which costs are incurred. Even if the rent is right, you can run yourself out of a good deal by failing to include exactly what you are responsible for paying within the lease during negotiations.

2. Set cost parameters

Negotiate and establish a cap on the periodic percentage increase in order to avoid unmanageable rent increases. This should be one of the first things you discuss with the landlord.

3. Require an exclusive use clause

The exclusive use clause should include detail about the types of services your business will be providing or the types of products you might sell. From a tenant standpoint, the exclusive use clause should restrict the landlord from leasing any common or connected space to potential competitors. For example, if you are going to own a bakery in a shopping center, you want to prohibit your landlord from leasing other space in the shopping center to another bakery or like-minded business.

4. Determine responsibility for maintenance and repair

Typically, landlords will try to hold their tenants responsible for maintenance and repairs for any issues other than the roof, exterior walls, or parking lots. With this responsibility, a prospective tenant could end up having to replace old equipment such as the plumbing or air conditioning systems, which can be pretty costly. If the building is relatively old, you might want to consider getting the HVAC systems, plumbing, and electrical equipment inspected. If you find problems, it will provide leverage during negotiations. Do your due diligence, or find out the hard way.

5. Remember the little things

If it’s not in writing, it didn’t happen. That’s why it is imperative that every detail negotiated is clearly explained. If a business needs signage, be sure the lease agreement doesn’t prohibit the use of signs that are visible from the street. The lease should also include assurance that expenses won’t increase within the first 12 months of occupancy. Additionally, there should be a discussion on subletting options. The tenant will only be able to find someone else to cover his or her rent, if needed, if an assignment or sublet clause is in place.

Even if you are a strong negotiator, you won’t want to go through negotiating a commercial real estate lease alone. A good broker is essential, as they will have the experience in the area to know what landlords have been offering and how they may try to negotiate with tenants.

For over three decades, South Florida businesses and investors have known Morris Southeast Group for its market knowledge, valuable insight, expertise, and resources to guide clients through the real estate decision-making process. To learn how we can help you find a commercial real estate lease you can feel safe with, contact our team today at 954.474.1776, reach Ken Morris on his cell at 954.240.4400, or email kenmorris@morrissegroup.com for a free consultation.

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