Starting out as a commercial real estate investor.

Several times each week, I receive phone calls from budding real estate entrepreneurs who are interested in entering the commercial real estate market as investors.

Though their interest and enthusiasm are often unbounded, many of them have little if any experience being landlords and are unaware of what particulars to look for when considering the purchase of a commercial property.

The potential landmines are different and more numerous compared to single family or small one to four unit residential investment properties. Novice commercial investors are often unaware of the various potential red flags that should warn them to consult various experts or even to pass on a particular deal.

Here are a few suggestions of basic steps one may take prior to entering the commercial real estate market.

1. If you have not owned any commercial properties, such as 5 plus unit multi-family dwellings, small office buildings, retail centers, mobile home parks, etc, you should consider taking on a partner. A potential partner should be someone who has considerable experience as a successful commercial real estate investor and property manager. Furthermore, a partner should be someone whom you know and trust, someone who has a reputation for probity in all his dealings. Once such a person is selected, then a partnership agreement should be drawn up by an experienced real estate attorney.

2. If you are planning to purchase a commercial building and have not owned or managed one, then you may want to consider hiring an experienced building management company. Such a company will cost you a percentage of your profits, but in the long run, that company will not only save you a great deal of money, but also relieve you of numerous potential headaches. As with a partner, the management company can serve as a wonderful teacher, adding to your overall experience and knowledge, thus making you a more independent investor/manager in the future.

3. Another alternative to going it alone is to invest in a limited partnership with an experienced sponsor/ general partner. The general partner will do the necessary due diligence (which you should thoroughly study and verify). The sponsor/general partner, by protecting its own investment, will also be protecting your investment. This is often the safest way to venture into commercial real estate investing.

Once you have made a decision about how you want to operate and have chosen a property that you might want to purchase, you must do the most exhaustive due diligence possible. Before you begin, however, be aware that you need to coordinate your due diligence with your lender. Your lender may require that they order certain reports, or that certain vendors are used. You don't want to buy certain reports twice, once for yourself and once for the lender!

To begin, you should retain the services of an engineer to inspect the building you are considering buying. This will be an out-of-pocket expense, but it's an investment that is entirely necessary. Have the inspector help you create your own checklist of what you should independently inspect, items that may not come within the purview of the inspection and which you can check.

There are a number of important items that an inspector will consider: If a building was erected before 1980, the inspector will want to make sure that there is no lead-based paint on its walls.

He will also want to make sure that all wiring is up to current code and is copper, not aluminum, check to see if there is a problem with mold and, if asbestos is found, it will have to be removed before a lender will provide financing for your building.

After your inspector has examined the building's heating and air-conditioning, you should ask the seller for a warranty on those systems.

Regarding a building's financing, it is essential that you look at all of the building's operating expenses. You should speak with the city/county tax authority to make sure that the owner has been candid about the tax liabilities of the building. Remember that a new assessment may double or triple your taxes.

In addition, you want to personally inspect every unit in the building. Make sure that the building's occupancy rate is exactly what the owner says it is.

You should also contact the building's insurer and obtain the "loss runs" to learn how many claims there were on behalf of the building and its tenants. If the number is excessive, it may indicate problems with the building. Get a current quote based on the lender's and your minimum insurance requirements; a new insurer may want to significantly increase the premiums on such a building.

Your and your lender's due diligence should overlap--they will want as much as you or more. After everything has been done, your lender will want to see all documentation. An institution that finances your property will want to protect its investment by making sure that everything is in order.

If all due diligence is performed thoroughly, your first commercial real estate investment will be an excellent learning experience, one that will permit you to expand your horizons and move successfully into other investment properties.

BY JOE MARDESICH, PRESIDENT & CEO, NATIONAL COMMERCIAL FUNDING, INC.