In the first post, of this two part series, I talked about knowing your cap rate and knowing what the cost of taxes and insurance on the CRE investment property will be. If you didn’t get a chance to read it yet, I encourage you to check it out at 5 Things to Know When Buying a CRE Investment Property (Part 1).
In this post, we will wrap up the five things to know when investing, by looking at deferred maintenance items, market rent and potential future uses for the property.
Know Deferred Maintenance Items
Buyers should always do a thorough inspect of the property in order to determine what deferred maintenance there is on the property. Deferred maintenance is when a property owner postpones maintenance on a property, thereby, passing this expense on to whoever purchases the property in the future. These potential future expenses are important for buyers to know because any unexpected expenses will decrease the buyer’s future NOI on the property and reduce the buyer’s rate of return. The main expense items of concern are typically the roof and air conditioning system. However, buyers should also take in to consideration the condition of the flooring, paint and fixtures throughout the property. These are important because a buyer could incur significant cost in replacing these items in order to keep the property leased in the future. If a buyer determines that there is significant deferred maintenance on the property, the buyer will want to adjust the price they are willing to pay for the property down in order to compensate for the reduction in NOI that these anticipated expenses will cause.
Know What The Market Rent Is for the Property
It is important for a buyer to know whether or not the property being purchased is currently leased at, above or below the current market lease rate for the property. This is important because it can affect the value of the property in the future. If the property is currently being leased at a rental rate above market rent, then the buyer may have trouble obtaining the same NOI on the property once the current lease expires. Therefore, this will reduce the buyer’s rate of return on the property in the future. If this is the case, the buyer will want to adjust the price of the property down in order to compensate for the future potential reduction in NOI. If it is determined that the property is currently leased below the market rate, then the buyer may be willing to pay a little more for the property, knowing that there is potential to increase the rent in the future and, therefore, potentially increase NOI and their rate of return.
Know Potential Future Uses for the Property
Knowing the potential future uses for the property will help to determine how difficult it may be to re-lease the property in the future should the current tenant ever move out. This is important to know because even if the property is currently producing an attractive NOI, the buyer may not be able to achieve the same NOI in the future if the property is difficult to lease out. Limited potential uses for the property will have a negative impact on the value of the property. Conversely, a property with many potential future uses will be easier to lease out and it will be easier to maintain or increase the NOI in the future, thus, giving the property more value as a CRE investment.
Know the Value of Your CRE Investment Property
I made this point in part 1, but it’s worth saying again: When we make that important decision to buy CRE investment property, a buyer, most importantly, needs to know what the value of the property is. If a buyer will make sure to research and determine the three points made above, along with the two in my first blog post, before purchasing a property, it will help the buyer make an accurate determination of value. This will ensure that the buyer will make a sound investment decision. If you need help determining the value of an asset, feel free to shoot me an email at email@example.com.
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About Joey – Joey Canella is a member of the SVN | Graham, Langlois & Legendre team in Baton Rouge, Louisiana. He has been in serving as a commercial real estate Advisor since obtaining his real estate license in 2008, prior to to that Joey practiced as a real estate attorney from 2006 to 2008, where he handled residential and commercial real estate transactions. Joey specializes in investment property sales as well as office sales and leasing. He currently serves on the Office Market Committee of the Baton Rouge TRENDS in Real Estate Conference. To contact Joey, you can call him at 225-367-1515 or you can email him at firstname.lastname@example.org. You can also follow him on Twitter at @svngll or on Facebook.