As a commercial mortgage broker with almost 35 years of lending experience, I am often approached by first time investors who are looking to buy an apartment building as an investment. These new investors want to understand the steps involved in locating and purchasing their first building. The following guide should be followed:
Check Your Credit – go online to one of the free credit reporting sites on the internet and run your credit report and credit scores. Lenders expect to see borrowers with a good credit rating. If any negative items appear on your credit, make every effort to clear up these items in advance. If you have experienced past problems, be ready to explain these problems in a well written letter of explanation.
Locate an Experienced and Competent Real Estate Agent – make sure you find a real estate agent that specializes in apartment buildings. Most agents that sell homes for a living have no experience selling apartment properties. As a first timer, you need an agent that can help you through the details, as a commercial investment is much different than buying a home. The agent should understand which neighborhoods are on the rise and which neighborhoods to avoid.
Get Full Disclosure – it is crucial that you obtain complete financial records on the property. Do not rely on verbal statements. You need to verify all income by looking at the leases and all expenses by looking at actual bills. Most sellers overstate the income and understate the expenses. Do your homework carefully.
Visit the Property – do not consider making an offer until you inspect the interior and exterior of the property carefully. Is the property in good repair? Is there any deferred maintenance? Are the units actually occupied or is there apparent vacancy? Is the neighborhood relatively safe and free of crime? Are there other buildings in the nearby area that are in disrepair or suffering from high vacancy?
Make a Legitimate Offer – don’t be fooled by a high asking price. Calculate the gross income and subtract expenses to come up with a net operating income. The NOI needs to be adequate to cover a proposed mortgage, as well as, return a profit to the owner. If the numbers don’t work, keep shopping.
Engage an Experienced Commercial Mortgage Broker – a commercial mortgage broker specializes in financing investment properties and will understand all of the nuances of a commercial mortgage loan. It is crucial that you find a broker who is competent and experienced. As a first-time buyer, the advice you receive will be invaluable. A good broker will make sure you offer a fair price and do not overpay. He will understand the market and negotiate the best terms available for your particular needs.
Be Prepared to Move On – many investment opportunities are not fairly priced. Do not make the mistake of falling in love with a property. This is an investment and you need to remember that the goal is to make a profit. If the property does not make sense, move on and keep shopping. Your commercial mortgage broker will assist you in this regard.
Stephen A. Sobin is the President and Founder of Select Commercial Funding LLC, a leading nationwide commercial mortgage brokerage company. For more information, you may visit their website at www.selectcommercial.com.