Need Advice On My First Real Estate Investment Deal
Hi:
I'm interested in purchasing a commercial property as an investment,
and would like to hear some ideas from experienced investors.
Scenario:
I currently own a home (primary residence) with a market value of
approximately $400,000. The current mortgage balance is $40,000 @ 6%
interest.
I applied for a home equity loan in the amount of $350,000 thru
Lendingtree and received attractive offers from six lenders with rates
in the 5 to 6% range. My FICO score is 730.
I intend to pay off the $40,000 mortgage, and use the balance to buy
an investment property using the balance (up to $300,000).
The property I'm interested in has been on the market since August.
The sellers are asking $369,000. The building is fives years old
(rebuilt due to a fire). It is a corner property with a grocery store
on the main floor and with a large apartment above. Four one-car
garages are behind the building. The lot size is 7500 square feet.
The agent told me that a few prospective buyers have expressed
interest in the property but the financials weren't approved.
I believe that $369,000 is over market value for the property. I'd
like to get it for around $300,000 max. How would I proceed with
negotiations with the sellers?
The sellers are a very elderly couple.
As a side note, I intend to set up an LLC to buy the property.
Any advice or suggestions would be greatly appreciated. Thanks to all
in advance.
:-?
Here are a few thoughts/suggestions:
First - you will need to determine the value of the commercial property using a quick cap rate formula. In my area, a decent cap rate is 9 or 10%. You would take the net income of the investment per year, and divide that amount by your cap rate. This will give you an idea of what the market value of the property is. You can structure your offer using that as a guide.
Second - If you are interested in real estate investing as a career, or if you want to purchase more property, you may want to consider taking out a commercial loan on the investment property and keeping a line of credit available on your primary residence for additional investment opportunities.
Thirs - an LLC is a good vehicle to use for rental and income producing properties. You didn't mention if the grocery store was leased or if the property owners also own the business. If the business if being sold with the property, I would set up the store as an S Corp and have the LLC lease the property to the S Corp.
Best of luck to you it sounds like you are off to a great start in REI!
It never hurts to make an offer significantly lower than asking price when paying cash.