All Forum Posts by: Georgee Gilbert

 Depends on the agent.  Most residential agents are not familiar with investment properties, let alone commercial.  If you are only looking at 5+ units I would only use a commercial agent.  But if you are looking for 2+ units it would be ok to have 2 different agents.  Commercial is a different ballgame and most properties are not listed, it is relationship based.

What type of commercial property? It ranges from free standing stores large and small (for supermarkets to dry cleaners), small strips with several stores, small to large office buildings, mixed use, like a property with stores downstairs and apartments upstairs.

If your just talking stores, I looked at a number of single empty ones and you'll have to figure out why they're empty. Is it because people are going to newer strips nearby? What helped me was I was also looking for laundromats to buy, working with a store broker whose also a commercial realtor. One store, rented to a laundromat didn't do all that well because of traffic patterns, It was just awkward to drive to.

I was looking at a small strip with three stores, all rented, and one to a restaurant. My wife was in city planning, and knew the head of city planning whom she used to car pool with. Decided to drop in and pay him a visit, and we spoke about looking at a strip in town. He knew right away which one it is and asked if the seller mentioned anything about the new rules for providing parking depending on the number of seats in the restaurant. We answered "no".  He said they let the current strip landlord and restaurant tenant slide, but the new owners will have to pave the empty lot behind the strip to provide more parking. The town already spoke to the commercial property owner next store about an easement to get in and out for the additional parking. The sellers mentioned they knew nothing about it.

Talking about city planning, they're good folks to know if you plan to invest in a certain area. City planning usually have a master plan which for an investor is good to know.

For stores rented to businesses such as  dry cleaners, are there any contamination issues, past or present, which greatly diminishes the value and imposes liabilities for current and past owners?

There are insurance issues. My dad owned a mixed use properties, and commercial insurance varied greatly, so if he rented the store as an office, the insurance on it could be five time greater if it was rented to a restaurant.

These are just a few examples. You can do very well with commercial but there's a lot more issues you have to know and look into. 

Your asking the right questions, in general commercial due diligence varies from residential in the fact that you not only have to make sure the building itself is in acceptable condition but also confirm there are no other outside mitigating factors that could adversely effect the investment. 

As mentioned by @Frank Chin  you will want to make sure that the properties zoning allows for your intended use, you can find zoning definitions on the county website.

You will also want to confirm all tax/insurance information provided by the Seller. How much are taxes? are they delinquent (which would create a tax liability for you), how much will your insurance be and more importantly are there any outstanding insurance claims/liabilities with the current owner? 

Also mentioned by Frank is the potential for contamination. Ensuring the property is clean environmentally might be the most important due diligence item; if you purchase a dirty site - REGARDLESS OF RESPONSIBILITY - you automatically assume all liability for said contamination. Worst case scenario the health of your customers is effected but if it contamination is discovered the state may look to you to clean it up, which is far from cheap. A simply Phase 1 report will tell you all you need to know and will probably cost $1,000.00 for a small retail location. Generally speaking I would say you have nothing to worry about given the product type but you still need to have the report done. 

Obviously you will want a building inspection done (same as when you buy a house), which ranges in price but shouldn't be more than $2,000.

For items you can do before hand I would recommend checking on the zoning and also be certain that you can rent the space for enough money to get your desired returns; this can be done by talking with your potential tenants or even walking into neighboring business and asking how much they pay in rent. 

A commercial broker who specializes in retail can manage the whole process for you, a good broker will also be able to tell you about market lease rates and how long you should expect lease-up time to take. 

Good luck!

I would use the credit score as a tool but not definitive. Get creative and use your gut. For example, when a prospective tenant comes to look at an apartment, walk them back to their car and observe. Is it a mess inside? If they don’t respect their own stuff do you think they will respect yours? Little things like that can help form your opinion and give you better odds. In the end, use your gut feeling.

@Georgee Gilbert To be 100% honest with you I don't look at credit scores as much as I look 4 things.

1. What is ON the credit report

2. Debt to income ratio (along with high balance on any credit cards within last 2 years)

3. Eviction report

4. Job time (are they bouncing around a lot or are they stable)

The reason being is that just looking at the credit score, that does not tell the whole story. There are 5 factors that determine credit scores, so sometimes that score means nothing to me.  Also with any of my tenants with low credit scores, I work with a credit restoration company that builds the tenants credit scores up while in the house and they add the rental history to the credit report as well.  My tenants are very grateful to be given this education on top of being able to move into a nice house while doing so.  Knock on wood but I have not had to evict anyone since 2011.  That includes apartment units and homes.

I asked my PM this question the the other day and they said their minimum is about 550 and the average is in the 600s, across 500 plus units.

I’m a landlord but I am also a renter, so I’ve been on the other side of this too. One apartment I rented (to live in) last year, the owner wanted to charge me two months security deposit because I hadn’t been working in the area.

I told them I wouldn’t do that. My credit score is above 700 and I’ve never been late on any payment of any kind. I got them down to one month rent deposit, but my point is don’t over do it either.

I’d focus more on them earning 3X rent more so than their score. In my case my income was almost 9X rent which means it’s highly, highly unlikely I’ll ever skip out on rent

Hi Georgee:

As some have already noted, credit is only part of the equation. Those with great credit scores don't necessarily equate to a great tenants. I personally recommend using a "decision report" service whereby the tenant has to pass a certain level of criteria for credit and criminal histories. (I can recommend one if you want to contact me via BP message.) A score, as others have said, doesn't really give you a good picture of the rental worthiness of a prospective tenant.  Scores may have nothing to do with what makes or breaks a good tenant relationship. The applicant's rental history, criminal history and current employment status are, at times, a much better indicator of risk.  With all that said, if you're getting a full credit report on someone, reviewing and understanding the details and how the info might impact the tenant's ability to pay rent and utilities is what makes the difference.

Good luck!

Clay

I would look not only at the score but the history. If you looked at my credit I have 0 late payments in over 15 years, nothing is behind, no collections, judgments, etc. But My score hovers around 630-680 because I have a lot of new credit (not being used), student loans, a vehicle, a mortgage, several utilities in my name, etc. You would miss out on a great tenant if for some reason my score went lower. Don't just look at the number, look at payment history.