Looking to get into commercial real estate investing. Help please!
My buddy owns a stable and growing business in the area and while we were casually talking, he mentioned having a hard time trying for months to lease a spot in a location he likes because the property owner is not easy to work with. So I looked in the area and found a similar building for sale. My Buddy is looking to do a 10-15 year lease and already has 3-4 other buildings (in different areas of the city) he leases for his business. I’m thinking about financing the purchase of this building, which is located in a prime city/location with lots of development, and then leasing it out to him. Any tips, advice, words of caution from seasoned investors out there? I would need advice on the whole scenario from financing, leasing, property management, leasing, and investment side. I have bought and sold a few homes before but never anything in commercial real estate. Thank you in advance!!
[{"id": "e8icdje", "text": "And you just discovered the trick to succeeding in commercial real estate that some people take their entire careers to figure out. Have a tenant in pocket and you can buy a market price while hedging your downside risk. Its the insider trading of our industry that is completely legal. ", "replies": [{"id": "e8iiwpf", "text": "Thank you. This is my thought exactly. I will need to finance the purchase and what better way for banks to say yes than with my mitigated risk plan of having a 10-15 year lease already in place. As long as the tenants financials check out, I don\u2019t see why a bank or (hedge fund?) would deny the loan. ", "replies": [], "depth": 2}], "depth": 1}, {"id": "e8ih8lv", "text": "Have clear cut contracts. \n\nBe OK to evict him. Hopefully this will never happen, but if for any reason his business goes south and he stops paying rent you have to know today how you will handle the situation.\n\n&amp;#x200B;\n\nLook up cap rates, and have in the contract a clear yearly rental increase. You can discuss with real estate agents in your area about these things and research them. \n\n&amp;#x200B;\n\nLook up your obligations. If he needs certain adjustments to the property - who is going to cover the costs? Before purchasing, do an inspection together and see what work needs to be done (bringing it to code, electrical, problems, etc.) and decide who is going to cover what cost. There should be full agreement before purchasing the property what as the landlord, you would need to invest to make the property ready for him. ", "replies": [], "depth": 1}, {"id": "e8iiral", "text": "This is great feedback, thank you! Particularly as I know his business will require some moderate additions. He did already tell me he offered the other landlord to pay for the costs of putting everything back the way it was when he vacates so I\u2019m sure that won\u2019t be an issue. But yes, need to get everything in writing. What type of attorneys and contractors should I be looking for to get all of the necessary contracts and paperwork? ", "replies": [{"id": "e8iwejb", "text": "If the property is listed with a broker, get another broker to represent you. Find one with a CCIM or SIOR designation. If they do enough business, they'll have banking and attorney contacts they can recommend you work with. It won't cost you anything to hire a broker (if it's listed already the listing agent will split their fee with your broker) and you really want someone looking out for your interests.  Get a great accountant as well. You will probably want to form an LLC for this purchase. Good luck!  Once you have one you won't be able to stop!  ", "replies": [], "depth": 2}], "depth": 1}, {"id": "e8im86o", "text": "As a lender, I will want to see it preleased or a signed LOI, something meaningful than just an interested tenant. Plus given your inexperience, I will want to have full recourse. And net worth should be atleast 100% of the loan amount and liquidity atleast 10% of the loan amount. Will this be a single tenant building? If it is, there is rollover risk, so lenders may want reserves held back or have you pay ongoing reserves for leasing costs. Those are the couple of things to think about and ask questions about when you discuss with a lender. ", "replies": [], "depth": 1}, {"id": "e8ivgit", "text": "Get ready to sign recourse.", "replies": [{"id": "e8iy5br", "text": "Thanks for replying. Can you explain further?", "replies": [{"id": "e8iy8f8", "text": "Basically, if you don\u2019t meet certain liquidity, experience, or net worth requirements then banks will typically require a personal guarantee to get financing.  Basically, if you default on the mortgage then banks can come after your personal assets.  I would just be prepared for that when you go to the bank.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "e8j0qgy", "text": "Read up on Jeff Sutton. This is how he got his start and albeit different era became one of the most successful retail investors in NYC.\n\nhttps://therealdeal.com/2014/04/04/how-a-leaky-roof-jump-started-jeff-suttons-real-estate-career/\n\nhttps://observer.com/2011/08/suttons-place-finding-the-king-of-new-york-retail/", "replies": [], "depth": 1}, {"id": "e8rxrpx", "text": "If he is a friend, he will want a friendly rate. I suggest keeping good friends out of money deals. Things won\u2019t end well I\u2019m not saying all deals go that way but keep that in mind. ", "replies": [], "depth": 1}]