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Should You Invest in Commercial Real Estate?

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By BRAD HESTER | Moonshine Ink

If you are a business owner, it is certainly a good time to look for and keep an eye out for a potential commercial building to house your business. If you are an investor, be aware that attractive opportunities do come along.

Truckee/Tahoe and the surrounding areas experienced almost no commercial real estate sales in 2008. Besides the recession itself, commercial money was simply all but impossible to obtain.

It makes sense as commercial loans are riskier than ones for an owner-occupied residence, but thankfully, after the local commercial market had some wild swings between 2008 and 2012, we’ve since seen a pretty steady increase in the number of sales as well as the price per sale.
The reasons are simple: The economy is much healthier than it was five to nine years ago, and commercial lending is once again moving along at a reasonable clip with great interest rates.

An Investor’s Point of View

Commercial real estate is sought after and purchased by either investors or owner-occupied businesses. Investors are specifically looking for a return on investment (ROI) — we call this the cap rate. For example, if we purchased a building for $100,000, as investors, we would want to see a net operating income (NOI) on our profit and loss statements of somewhere between 5 and 10 percent per year.

I have folks approach me asking to help look for a commercial building with a 9 percent ROI. They get confused when I tell them that it is more common in the Tahoe/Truckee area to hope for a 5 to 6 percent cap rate. I tell them that they can probably get their 9 percent return if they will be purchasing an investment property in Stockton or Bakersfield.

Should a Business Owner Consider Owning the Real Property?

Another motivation for owning commercial property is that of small business owners wanting to own the property that they operate their business out of. Most leases are what we call “triple net leases.” This means you are already paying the property taxes and insurance (for your landlord) that are applicable to your space. What remains is for you to decide if it is more beneficial to pay rent or consider paying a mortgage where you are gaining equity while owning the property you are presently renting.

Many times, the cost differential is not that much. It’s worth an in-depth discussion with your tax advisor to see the different ways one can achieve benefits by owning the commercial property that houses one’s business. Factors like depreciation can play an important role in one’s taxes.
Never try to do this on your own, though.

Do You Need a Mortgage?

Commercial lending is another, and often necessary, arena to become educated in. Commercial loans are much different from the loans most folks are familiar with. Whereas most of us think in the realm of a 30-year, fully amortized product in the low fours on interest rates, the terms of most commercial loans range from five to 20 years. They may be amortized over 30 years but could have a due date in substantially less time. Additionally, the interest rates are often higher. Rates and terms will also vary according to whether or not it is investor-owned or owner-occupied, type of property, and amount of down payment.

Nevertheless, commercial rates, as a whole, are very attractive in today’s market. We can see SBA or USDA products from 4.75 percent to 6.75 percent. Individual banks or lenders also have attractive rates than can sometimes outcompete the governmental products. I am seeing many of the local banks offering really good rates and terms in this present market. Also, be aware that down payment requirements will typically want you to have more “skin in the game” than residential loan products. Always read the contracts very carefully, some loans may also request a personal guarantee or cross-collateralization in addition to the note and deed of trust.

~ Brad Hester has been a full time real estate broker in the Tahoe/Truckee area for more than 30 years. He owns real estate offices in Tahoe City and Tahoma as well as two retail toy stores in Tahoe City and Squaw Valley. To contact Hester email laketahoehester@gmail.com.

 
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August 10, 2017