By TOBIN MCANDREWS Special to the Daily Press
Commercial real estate is booming in Santa Monica and throughout the Westside, but only the savvy investor will make the most of his or her money.
Tax benefits and the long-term appeal of a steady positive cash flow have driven prices up and cap rates down. Although this might appear an unattractive confluence, the market continues to excel.
Like any investment, however, the details involved in completing a successful transaction are risky and require careful attention.
One should always consider cash flow, capital appreciation, tax benefits, loss of management, equity pay down and pride of ownership when deciding to invest in commercial real estate.
You should always double check any figures or facts supplied by a seller because exaggerated rates of return are not uncommon. Carefully review current rents, payment history, taxes, expenses and deposits supplied by a broker or owner. More often, owners overstate earnings to a broker in order to list the property at a higher price. Brokers are middle men — they are not responsible for verifying documentation supplied by an owner so you must do your due diligence.
You should also obtain an estoppel certificate from all tenants. This document confirms actual rents. Make sure you work with a broker with a good track record. An inexperienced or inattentive broker could lead to problems down the road.
Unlike making a passive investment in the stock market, managing a property takes time and effort. One should always consider the personal time commitment involved in running the day-to-day operations of a manger or landlord. Take care when hiring a company to manage your property. Like a real estate broker, it reflects on your commitment to your tenants. Avoiding negative cash flow can be difficult. Vacancies can lead to losing your investment, so carefully select your tenants and address their needs promptly.
Make sure that you do not overextend yourself by committing too much of your working capital or carrying a variable APR on your loan. A swift change in rates, coupled with an unexpected vacancy, can quickly ruin an investment and force you to sell prematurely, well before the long-term benefits of owning commercial property can be realized.
Always do a through property inspection. Although you might save a few bucks in escrow, the problems that could arise without an inspection can sour a great investment. On the other hand, the competition for most “good deals” is so intense that to even be considered by a smart seller a buyer often must waive his or her inspection contingencies all together. So, make sure you carry the necessary insurance to protect your property should a mishap occur. Consult a commercial real estate insurance broker for details.
And make sure you are getting any personal property that is included in the sale. Just because the broker tells you the pinball machine is included with the sale, does-n’t mean you get it unless it is specifically noted in the contract. Always get a list of these items.
Finally, reinvest your gains. The smartest investors delay the party until their financial end game is met. By paying off your debt, you will own your property quick-er. Adding an extra payment every year can dramatically reduce the length of a mortgage. Substantial equity affords more leverage in acquiring more property. Investment property can be one of the most financially rewarding components of a financial portfolio. Make smart choices and if you are a novice investor do not jump into anything without first consulting with a professional commercial broker.
Originally published in the Santa Monica Daily Press print edition on July 20, 2005. Read the original PDF.