Net Leasing Can Free Owner From Managing
QUESTION: My husband recently died. He and I owned a commercial building that is leased to a business. The lease is up for renewal soon.
Since I don’t know much about real estate, my attorney suggests I lease the building for five years on a net basis. Do you think this is a good idea?
ANSWER: A net lease is an ideal no-management investment if you have a first-class, reliable tenant. There are several types of net leases: a net-net-net lease means the tenant pays the maintenance, taxes and insurance.
But there are other types of net listings where the tenant pays only some of the expenses. Be sure there is no misunderstanding as to which type of net listing is being contemplated. Also, check on the tenant’s financial status to be sure the tenant can meet the lease obligations.
Protect Yourself on Foreclosures
Q: I recently read a Wall Street Journal article about all the foreclosed office and apartment buildings. There are several such properties that mortgage companies have taken back in the town where I live. Do you think this is a good time to buy these properties for very low down payments from the foreclosing lenders?
A: If you buy such properties, be sure you purchase “without personal recourse.” That is extremely important, so the mortgage lender cannot go after your personal assets if you have to default.
The reasons for the current oversupply of office and apart ent buildings in most communities are many. Part of the problem is the 1986 Tax Reform Act which took away major incentives for owning such buildings. Other causes are overbuilding and the recession.
If you are going to acquire distress properties, please be certain you know what you are doing. In addition to obtaining a bargain price and bargain financing, you need to know how to turn those distress properties around.
I cannot overemphasize the importance of not risking your personal assets. Many fortunes were earned during the Great Depression of the 1930s by real estate investors who acquired distress properties from foreclosing lenders for virtually nothing down. Please be very careful.
Hard to Find Land Financing
Q: We own a 24-acre parcel that we need to sell to raise cash. It has been listed over six months with a local realtor, but she admits there are no prospects because we need a cash sale and won’t finance the sale. Is there any way to arrange a loan of about $200,000, so we won’t have to sell?
A: Obtaining land financing has always been very difficult, but today it is virtually impossible except at prohibitively high interest rates.
The reasons are many. One is the high risk of foreclosure unless the borrower can afford monthly interest payments from other income sources. Another is that even if the lender forecloses, chances of profitable resale are slim and the risk of loss is very high. Still another problem is that lenders today want only prime loans and that means single-family houses.
At best, you might be able to borrow 50% of the land value, presuming you have excellent credit and income. Consult a local mortgage broker.
