Commercial Real Estate Completing A Transaction
Topics: commerical real estate
Many times you’ll be able to get a tax and or repair or maintenance credit at closing from the seller of the apartment property. For example, in Iowa, if you buy a property at a certain period of time, you could get up to one year of property tax credited to you at the closing table - a large savings! Also, in the event that there’s repair and maintenance costs that need to be done, you can have that credited to you at closing as well, further reducing your down payment. Think of it this way, you could use the combination of tax credits and repair credit to reduce your down payment substantially.
For example, let’s say you’ve got to put $50,000 down payment on an apartment property. After looking through all of the units, you notice that you’re going to need about $5,000 of repair and maintenance that’ll be needed right away. You talk to the seller. The seller agrees to credit you the $5,000 at closing. After you talk with your broker or your closing and/or escrow person, you find out that you will also be getting a tax credit at closing of $7,200. So, when it comes to closing, when it looked like you would have to come up with $50,000, now it’s reduced $5,000 by a repair credit and another $7,000+ by a tax credit.
So, now you’re going to come to closing with $38,000, versus $50,000. Rent pro rations. You’ll always want to time your closings to happen the first three days of the month. The first, second, or third. Why? Two reasons. No or little prepaid interest. Many people don’t know this, but when you make a mortgage payment, you’re paying the interest from the month before. So, when you make March’s mortgage payment, you’re paying February’s interest, when you make July’s mortgage payment, you’re paying June’s interest, etc. So, when you take over at the beginning of the month, you will not have any interest that you need to pay; however if you take over at the end of the month, they will charge you interest for the entire month. Smart strategy.
In other words, the current owner can receive the rents from the tenants, but give you a credit for the rents he is to receive, or worse case scenario, you take over on the second of the month, all the tenants pay you once you take over, so you still have your $5,000 in rent; however, you don’t have to make a payment on your financing until the following month, which means you get all the rent for that month without having to make any kind of payment to a financing company, bank, etc.
Nice cash flow and if used wisely, could be a nice credit to you at closing. Tax pro rations. As I said, many states pay taxes in arrears, so at closing you can get tax pro rations that will be do in the future, but not yet payable. Use these pro rations wisely.
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