Tips for Your Style
Considerations for Commercial Landladies
Many new owners of commercial property are so anxious to fill vacancies that they sacrifice the long-term health of the property for the short-term win of having a paying tenant. Having a big-picture vision for the site and an understanding of the market is vital to your financial health.
- Understand the demographics of the area and look for businesses that fit. Just because someone wants to open a yoga studio in your building, doesn’t mean that the area is ready to support that.
- Consider the business cycle of tenants including peak times. For example, putting a CPA who is busy during tax time with a retail outlet that is busy during the holiday season is a great way to maximize available parking and possible expansion space within the building.
- Consider clustering groups of complementary tenants, for example, a masseuse, a chiropractor, and Reiki practitioner.
- If the building has existing tenants, read and understand the leases that are in effect.
- Check out my Blog post to read further.
Being the Bank
One way to earn money in real estate that is largely hands-off is to finance an experienced home developer or flipper. This can be great if you do your homework and choose the right partner and a potentially expensive lesson if you do not.
- Establish a legal entity to do the actual lending.
- Develop clear criteria for lending. Use the same criteria for all applicants to avoid the appearance of discrimination.
- Partner with or hire an attorney who will create the proper loan documents and evaluate deals.
- Partner with or hire a person experienced in the type of construction that you’re thinking of financing.
- Read this great series: https://www.fortunebuilders.com/becoming-private-money-lender-part-1/
- Ask lots of questions. Make sure you understand every aspect of the arrangement including all of the worst-case scenarios
Depending on your situation and the type of deal that you’re putting together, private financing may be the best option. Whether you’re asking family and friends, your local bank or a private money lender, you’ll need to do your homework.
- Get your ducks in a row – prepare financial paperwork for yourself and for the cash flow of the property both now and post-renovation. Be prepared to show the future value of the updated property and a detailed budget for the renovation.
- Use worst-case scenarios – it’s tempting to only see the bright side when you’re evaluating a property but the investor will be wise to focus on what can possibly go wrong. By anticipating these hitches in advance, you’ll be better able to address concerns and more prepared if the worst should happen.
- Know in advance what you can realistically afford. Do not deviate from this number. If you can’t finance the property using real numbers, try to negotiate a lower price or walk away and buy something different.
- If borrowing from family or friends, keep it professional. Don’t feel offended if they want to have their attorney look over or prepare the loan docs. Get everything in writing and talk through all the bad stuff: what if someone dies, the project fails, things go horribly wrong – and all the good stuff: what if you make untold millions on the deal, are they going to want a cut or feel bitter? The more they know about your plans, the better you can negotiate and record – in writing – your mutual understanding.
- Options for repayment:
- You have a traditional-style loan with an amortization schedule and regular monthly payments
- You have an interest-only loan with a balloon payment on some future date
- Your investor becomes a partner and shares a percentage of the profits
- Some combination of the above