Many indicators show that the economy is strong, which means that small businesses are following suit.

Small business finances were at their strongest in 2017 since data collection began in 2007, according to Q4 2017 Insights data from BizBuySell. Median sales of businesses sold have increased by more than 5 percent this year. There is also a trend for home businesses to move to physical locations, says Danny Mulcahy, director of equity for Northstar Commercial Partners in Denver.

This bodes well for owners of the small offices and retail spaces they occupy, who have the potential to profit from their success in the form of above-average potential returns.

But before investing in small commercial offices, retail businesses and industrial properties, which are very different products from residential investment property, it is important to do your due diligence and consider the following tips, according to: the experts.

Hire a good team of advisors. “Deciding to invest in commercial real estate is usually a big decision,” says Michael Marsh of real estate brokerage firm Lee & Associates in Phoenix. “There are many factors to consider, such as legal structures, financial assessments, liability, loans, tax implications and property management. “

A sales specialist in the type of commercial real estate you’re interested in will have the best information available to consider, he says.

“A commercial broker will be able to quickly process a large number of properties and present off-market opportunities,” he says.

An investor should also get an idea of ​​financing options from a knowledgeable commercial real estate banker. An experienced real estate attorney can help put the right structure in place to own real estate and set up rock-solid leases, Marsh adds.

Avoid empty buildings, at least to begin with. “The main criteria for selecting such a [commercial] property is to seek out those with cash flow, ”says Spencer Chambers, a general contractor and real estate agent with The Chambers Organization in Newport Beach, California. “This is the reason why you make any real estate investment. Avoid the ones that don’t make money. »Properties with cash flow are more proven, and it is easier to obtain financing to purchase them.

Find a niche. Mulcahy suggests thinking outside the box when it comes to a small business investment strategy; he likes light industrial properties, which meet the need of growing e-commerce businesses to host their wares.

“Service-oriented businesses are more likely to represent the bulk of businesses moving from a home office to a commercial space,” Mulcahy said.

Check tenants carefully and put in place collateral for the collection. Unlike large mall and shopping center tenants, who have verifiable credit scores and standards for assessing the viability of their business, there is no foolproof way to judge the creditworthiness of small independent businesses, says Mulcahy.

“I would take a close look at the business plan and finances of the company, I would assess the credit rating of individuals, I would have personal guarantees on the lease and I would limit the terms of the lease,” he says. .

A personal guarantee, written by a real estate agent, allows the owner to recover the personal property of the owner of the business in the event of default.

“Always prepare for the worst possible scenario,” Marsh said.

Do your research. Small commercial real estate is a more delicate investment than residential. Before you buy, ask, “What are the rents for comparable properties?” How quickly are vacant units filled in the region? How much should you expect to spend on maintenance and repairs? Explains David Reiss, professor of real estate at Brooklyn Law School. “You want to be able to predict the likely income and expenses the building will have. ”

Also carefully assess all current tenants and their leases: “There is a big difference between buying a fully leased building with tenants who pay their rent regularly and have a lot of time on their lease and a building has tenants. with monthly leases that are behind on their rent, ”he says.

This is because the biggest costs to the homeowner are vacancy and management. These often aren’t effective with a limited economy of scale compared to large landlords and real estate investment trusts, says Walt Batansky, chief financial officer of The Lawyer Group, a corporate real estate company in Tampa, Florida.

Look at the capitalization rate. The capitalization rate of the building, based on its net operating income, is used to value a commercial building. To arrive at the cap rate, net operating income (or annual rental income minus expenses but before mortgage payments are factored in) is divided by the average rate of return for similar properties in the area.

You should go as far as your purchasing power allows, which is anything you can get a loan for, ”says Chambers. “As long as you buy a property there is cash flow from day one. You want to buy something with a cap rate greater than 8%. “

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Fund information as of February 5, 2018


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