* Click on the Pluse to expen the answer.
Commercial real estate is a specialized industry. Most brokers concentrate on one or two property types, such as offices or warehouse. Select a broker who has a proven track record in the type of space you need. If you have a certain type of property you'd prefer to purchase, make sure you ask the broker if they specialize in that type.
Three of the main types of commercial properties are office, industrial, and multi-family.
This will give you an idea of how active they have been in the market. Size of transactions-ie office buildings, apartment buildings, hotels.
One term commercial investors use is a cap rate. This is a ratio of the net operating income over the price you pay for the building. Ask your broker for the average cap rate for similar buildings to the ones you are considering buying. If the cap rate of your property is much lower that will mean the ratio of annual net operating income compared to the price you paid is lower than what is average in the market. If a broker is recommending you buy a building with a low cap rate, you will want to ask why. It could be the previous owner was charging below market rents and you will have the opportunity to raise them as the current tenant's leases expire (or they may have already expired), or possibly the building was not entirely rented out in recent years. Another reason could be because they feel the building's value based on square footage and location could be underpriced currently and expected to go up in subsequent years. Keep in mind with an investment property you will receive two streams of income, net operating income, and the future income when you sell the property at some point.
Ask them for sales comparable reports showing similar properties they have represented buyers or sellers within the past year as proof. This will give you an idea of how active they have been in the market.
Your broker should be able to provide you with a rent roll which will tell you who each tenant is, how much rent they pay, what the terms of each lease are and when it expires, as well as when leases are increased and how often.
Ask for a pro forma, which is a document that details all the expenses and income associated with a building. The income should match the total rents and fees indicated in the leases. Expenses will include anything the landlord pays to maintain the building and keep it rented. These will include common area expenses, such as electricity and maintenance of the grounds and parking areas. It may also include trash removal, a repair budget and a number that accounts for the vacancy rate. The bottom line will show the net operating income, or NOI. You or your accountant will need this number to calculate the return on your money and, hence, the building profitability.
Area developments can affect a building profitability.
If it is, you will have to pay rent on the ground under the building as well as pay for the building itself. You will want to know what the terms of the lease are, how long it will last and whether its renewable. Not paying for the land is an advantage of a ground lease; however, you also do not enjoy the appreciation that may grow with commercial land.