FAQ - Real Estate Investing
by Jerry Chautin, SCORE Chapter 48, Atlanta, GA.
How can I buy multifamily rentals or commercial real estate for investment? Buying multifamily and commercial income producing properties can be rewarding investments. At the beginning, you should avoid owning property outside of your immediate area. That way you can know every property in the neighborhood that fits your investment profile and jump on opportunities as soon as they become available. By being in close proximity, you can also maximize your maintenance and management control to increase asset values. Successful real estate acquisition professionals inventory every property in the marketplace that meets their profile. To help, you can subscribe to lists compiled from the county courthouse records. Alternatively, drive the neighborhoods and search the records yourself. Some of the best acquisition candidates are not advertised and may not be listed with real estate agents. By contacting owners, you might persuade them to consider an offer. Three things have to happen for you to negotiate successfully. 1. Establish credibility. Get the word out that you have the desire and financial ability to offer a purchase contract and close the deal. Sellers rarely agree to sell on the first visit so be prepared to make several calls. Form relationships with owners of properties that fit your profile. 2. Negotiate. Gather enough information about the property and the seller to make an offer. Get the rent roll, historical operating statements, physical details, copy of maintenance contracts, real estate tax bill, copy of the hazard insurance, condition of depreciating components (HVAC, roof, etc.). Don't tell the seller what you're willing to pay. Whomever mentions price first, loses. Instead, explain why you feel the net operating income (NOI) is lower than the seller's estimate. Allow negotiations to be over interpretation of the Gross Possible Income (GPI), operating expenses, reserve for replacement and the NOI. Then, ask the seller what he would think the property is worth with the NOI being lower than he thought. 3. Close the deal. All the major business points (i.e. purchase price, seller financing, etc.) should be agreed upon before making a written offer. Then it is up to the lawyers. The contract has to withstand a process known as "due diligence" before the seller gets paid and an actual transfer of title takes place. Your accountants, property inspector (engineer), lawyer and you, pour over the books and the physical structures to make sure that everything the seller told you is accurate. If it's not, the deal may be renegotiated. Buying multifamily and commercial real estate takes more effort than single family homes but the rewards can be greater. http://tenonline.org/sref/jc6c.html
Leasing Real Estate vs. Buying
by Jerry Chautin, SCORE Chapter 48, Atlanta, GA.
In my opinion, leasing is usually a better option for most business owners than owning. Sometimes, local situations may justify owning. We all know stories about the small business owner who's real estate was in the path of growth and was bought out by a developer for substantial profit. The romance of owning real estate can be compelling and hindsight is 20-20. But in other circumstances real estate proved burdensome and inhibited the growth of their core business. A lesson can be learned from major corporations who rarely choose to own their buildings. Often they sell or sell and leaseback their real estate to get it off their books. Here are some of the reasons. 1. Leasing affords more flexibility to expand or contract. It's a lot easier to renegotiate lease terms than have to dispose of a building in a soft market. 2. Buying and selling real estate is a matter of market timing that professionals are better at than novices. Too often novices buy at the top of the market and sell at the bottom. 3. Business owners often make real estate buying or selling decisions based upon the needs of their business rather than the real estate market. One of the 2 will suffer. 4. The business may be neglected because of real estate management distractions. Real estate management is best done by professionals. 5. Selling a business may be more difficult if the buyer is required to buy the real estate as part of the transaction. The seller is negotiating on 2 fronts and one will have a diminished outcome. 6. Precious working capital is tied up in financing the real estate. 7. You can only write off interest expense (not amortization) on a mortgage while lease payments are 100% deductible. 8. You can end up with phantom, taxable income when selling a depreciated building. 9. You should be spending your time making your business great and not having to deal with the day-to-day maintenance and management headaches of owning a building. Let the landlord do it. 10. Income to asset based ratios are improved by not owning real estate, which may help public companies compare better to others in the same industry.
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FAQ - Buy vs. Lease
by Jerry Chautin, SCORE Chapter 48, Atlanta, GA.
Is it better to own or lease business real estate? Often the choice to buy or lease space is ego driven rather than making the best business decision. In my opinion, leasing is usually the better option. We've all heard stories about fortunes made in real estate. But real estate can also be burdensome and may distract you from their primary mission -- to make your business successful. A lesson can be learned from major corporations who choose not to own their buildings. Here are some of the reasons. 1. Flexibility. Leasing affords more flexibility to increase or reduce space as needed. It's a lot easier to renegotiate your lease than dispose of a building in a soft market. 2. Market fluctuation. Timing the market is essential when buying and selling real estate. Professionals are better at it than novices. Too often novices buy at the top of the market and sell at the bottom. 3. Business vs. real estate needs. Business owners often make real estate buying decisions based upon the needs of their business rather than the real estate market. The best time to liquidate real estate may not coincide with the time to sell the business. 4. Managing real estate. Your business may be neglected because of real estate management distractions. Real estate management is a skill best left to professionals. 5. Your exit plan. Selling a business and real estate together may be more difficult. One will have a diminished outcome. 6. Working capital is compromised. Precious working capital will be tied up in the real estate. Lenders require a substantial down payment that could otherwise be used in your business. 7. Better tax break leasing. You can only write off interest expense (not amortization) on the mortgage while lease payments are 100% tax deductible. 8. Cash crunch. You may incur phantom income when selling your depreciated building. Phantom income is taxable profit without corresponding cash flow. 9. Financial ratios. Income to asset ratios are better when leasing than owning real estate. Some lenders consider that important. The romance of owning real estate can be compelling but leasing may be best for you. http://tenonline.org/sref/jc6b.html