expense statements from other properties. One document may leave out a vacancy rate; the other might exclude property maintenance components. Know vacancy rates in the neighborhood, and find out the average time to find a new tenant. Contact lenders and property managers in the area and get their feedback on your potential purchase.
2. Review operating expenses and cash flow for the past three years.
Many financial analysts’ reports will exclude capital expenses. Bear in mind that you need a reserve for property maintenance. If you review three years of income and expenses, you will have a much better idea of real expenses as well as vacancy rates.
3. Obtain comparable rent income numbers.
Drive around the neighborhoods where your potential property is located. Call the phone numbers on available properties and confirm the rental rates. Are there any concessions being given on lease space? Use this information to verify the figures you received for the property you wish to buy.
4. Examine the vacancy rate in the market place.
Each market and specific type of real estate investment has a vacancy rate. Even desirable locations like the West Side require a minimum of 3 percent factored in for the vacancy rate. In harder-to-rent areas, look for concessions and rebates being offered by property owners. How might these concessions affect your cash flow? Is your property rented at fair market value? Banks are hesitant to loan on properties with a high vacancy rate. They will, however, offer construction loans if you are renovating the building. This may give you some time to find tenants to fill a building, otherwise you will be forced to guarantee the rents, which means more money to the bank and less in your pocket.
5. Talk to an appraiser about the marketplace.
Appraisers are paid to know median incomes and expenses in any given marketplace. An appraiser offers accurate information so you can make an informed decision.
6. Review the IREM and /or BOMA expense analysis books for the marketplace.
7. Ask for schedule "E" tax return information for the property.
Schedule "E" – a.k.a. form 1040 – is the Supplemental Income and Loss From rental real estate, royalties, partnerships, S corporations, estates, trusts, etc. This is the information the current property owner gives to the IRS. Keep in mind some property owners keep two sets of books – one for themselves, one for the IRS. Some pay a handyman on the premises for repairs, and very little of anything is ever reported.
If you do your homework, you will have a clear idea of a property’s value. Then read the reports. At this point in time, analysts suggest an 8% -10% positive cash flow after all deductions.
Beyond cash flow, there are several other indicators you can compare
and analyze when pursuing your investment strategy. These include CAP
rate, cash-on-cash return, debt coverage ratios, price per square foot
for comparable properties in the same marketplace, percentage of expenses
(are they inline or understated). Also factor in financing and due diligence
costs as part of your transaction spread sheets.
For more on Southern California commercial properties there is a great
information blog at www.socalindustrialrealestateblog.com.