In the commercial real estate business you will eventually come across a distressed commercial property. Some of these distressed properties could turn a huge profit if you find a way to buy them and fix them up. In this post we’ll discuss what a distressed commercial real estate property is and when to buy a distressed commercial real estate property.
How to Buy Distressed Commercial Real Estate
What is a Distressed Commercial Property?
A distressed commercial property is an under-performing asset that significantly challenges the owner in one of three ways. Those challenges present themselves physically, financially, and can have legal issues associated with them.
Physically Distressed Commercial Real Estate
A distressed commercial property could be physically distrssed by being run down, obsolete, or having deferred maintenance such as a leaky roof or exterior/interior problems. Physically distressed commercial properties can eventually yield high rates of returns, but investors need to have the financial capital available to make potentially costly upgrades to the property in order to attract tenants or increase re-sale value.
Financially Distressed Commercial Real Estate
A distressed commercial property could be financially distressed if it is producing a negative cashflow each month, which forces the owner to pay out of pocket. Insufficient cashflow to handle the typical operations of a commercial property could cause it to become distressed. A financial distressed property could also mean a property underwater, meaning they owe more than it is worth.
Legally Distressed Commercial Property
The third type of distress a distressed commercial property can experience is legal distress. This could be anything from pre-foreclosure, liens, lawsuits, building violations or even partnership situations, where partnerships could be going south.
When Does it Make Sense to Buy a Distressed Commercial Property?
When the after repair value of the distressed property is greater than the acquisition cost, the repair cost, and the holding cost, that’s when it makes sense to buy the distressed commercial property. The after repair value (ARV) means the market value when a property’s stabilized. So when the ARV is greater than the sum of the acquisition cost, repair cost and holding cost, it makes sense to buy a distressed commercial property. All of the issues found in distressed properties, can be turned into opportunities. You can fix most of these issues, and once you fix them, it could equal great profits.
How to Learn More about Distressed Commercial Properties
Each commercial real estate property has a story. This definitely applies to distressed commercial real estate Your job is to get the story, and the more of the story you get, the better you are able to buy the property and know how to buy it. You will know which financing strategy will work and what your exit strategy should be. It is very important to get the story on any distressed property you are interested in.
Furthermore, we recommend partnering with an experienced commercial real estate developer when it comes to purchasing distressed properties. It is crucial that you have an expert guided plan to do distressed commercial property deal successfully.
Casey Development, Ltd: Commercial Real Estate Investors in Central Texas
Distressed commercial properties may not be the first choice for commercial real estate investors. However, finding the right distressed property to invest in is something the team at Casey Development, Ltd. has the expertise in doing. If you’re considering investing in distressed commercial property, don’t hesitate to seek professional guidance and contact our team today to learn how we can help turn your distressed commercial real estate investment into a high yield return on investment.