How to Structure Commercial Real Estate Deal for Maximum Profitability
Investing in a commercial real estate deal has historically been more attractive to passive investors. This is because it tends to offer higher yields than residential, although it does require more time or expertise in management. However, the new developments in this industry have changed how investors think about commercial real estate and what they need for success.
As an investor, you’re always looking for deals that meet your financial goals. The struggle is in determining what deals are ideal for you. Here are six steps that ideal sponsors do to make sure your commercial real estate deals will give you maximum profitability.
6 Steps to Structure a Commercial Real Estate Deal
1. Set Investment Goals
Sponsors set parameters about the asset classes that they’re looking to acquire once you invest with them. As you do the math, you’ll discover that a commercial asset has a different computation when rented out as compared to residential. Also, your Sponsor will set a time frame as to when you can expect returns on your investment. Are you planning to have a short flip or long hold? When you’re clear about this, your team will be directed to secure tenants that suit your time frame of keeping this investment.
2. Create a Foresight of the Investment
Creating a reasonable financial model on a property level allows you to assess whether you will be investing in a good deal or not. Sponsors consider all the projected income and expenses because it provides insights to you and the other investors. Also, you need to have knowledge about some key concepts; net operating income, cap rate, and cash-on-cash return. Having foresight of the investment gives you an overall view of whether the deal will financially make sense to you as a passive investor.
3. Factor-in the Investors’ Deal
At this point, Sponsors compare the financial model with that of your deal and see if the numbers on the bottom line agree. This is crucial since they are creating an opportunity that is most beneficial to you and other investors.
4. Adjust the Deal to Ensure Feasibility
If you want to start investing in a commercial real estate venture with other investors, always aim to strike a balance between what you want to get out of the deal while retaining your investors. Leave no stone unturned and disclose with your potential investors what everyone expects to gain from the deal. This is to avoid surprises during the splitting of your take from the deal.
5. Establish an LLC
Are you ready for the next step? Once you’ve dotted all the I’s and crossed the T’s of the deal with your team, it’s time to establish the partnership by forming an LLC (Limited Liability Company). Creating an LLC can help you maneuver any legal challenges on the horizon in form or fashion, to protect both the Sponsor and your fellow Investors. It also separates the business and personal assets of both parties.
6. Draft the Operating Agreement
The Operating Agreement will cement your partnership to make it legal and binding. The agreement outlines the responsibilities of the Sponsor and all participating investors in the deal. Furthermore, it stipulates the schedule of payouts for both parties once the acquired commercial real estate property is generating income.
At Trajan CRE, we’re here to make sure all commercial real estate deals come out favorable to all involved. We’ll consider all of the variables and show you the ROI and tax benefits. We’ll work with you so that reaching your goal is manageable: just ask! Get in touch with the Trajan CRE team today.
