Commercial Real Estate: Don't Steal From Your Property By Monte Lee-Wen At Isnare.com Ezine Articles

When you purchase a Commercial Property and leave the Closing Table ... you will take with you several different piles of cash you don't see in a Residential Real Estate Purchase.

They come in the form of
- Tenant Security Deposits
- Pro-rations
- Credits

And in a larger Property these can easily total hundreds of thousands of dollars.

WARNING:
We know of other Commercial Property Educators who advise you take this money at the close and use it to purchase additional Property. They crow about "Cash Back at the Close" as a major reason to move up to Commercial Property.

We strongly disagree ... and absolutely discourage you from taking cash out of ANY Commercial Property at the Close!

That is because all of this Money has a dedicated purpose.

If you use this money for anything other than its intended purpose in this Property ... you are literally Stealing it from the Property and your Investors. Taking this money can and will sabotage the success of your investment.

Always use this cash wisely and Only for its intended purposes...

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Tenant Security Deposits ...
Are to be returned to the Tenants when they move out. Set up an interest bearing account for them and transfer the appropriate amount of money directly from the closing table. This cash is spoken for.

Pro-rations and Credits ...
Are money already set aside for operational expenses and need to be kept off to the side until these expenses are actually due.

EXAMPLE #1:
If you buy the Property on July 1st you will receive a credit from the Seller for 1/2 the year's Property Taxes. This money is dedicated to paying the taxes when they are due ... and if you spend it instead - or use it for ANY other purpose - you have just stolen from the property.

EXAMPLE #2:
If you buy the property in the middle of the month and the Seller has already collected the rent you will get a prorated share of the rent collected ... in this case, 1/2 of it. This money has been generated this month to pay next month's bills ... leave it set aside in your operational account for use when the bills come due.

If you siphon off any of these funds for yourself or other investments, you are setting yourself up to run short of operational cash very quickly.

When this occurs your only recourse will be to ask your investors for more money ... this is called a Capital Call. AND there is nothing worse for your reputation as a Project Sponsor than a quick Capital Call.

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We recommend you open three bank accounts when you take over ownership

Operations Account - for the monthly in and out of income and expenses

Security Deposit Account - best if it is interest bearing. Transfer all Security Deposits directly into this account.

Reserves Account - always keep your reserve account topped up (we recommend at least one month of operating expenses). This is your rainy day fund and can be an interest bearing account as well.

We recommend you raise enough money from investors to fill the Reserve Account at the Close of your Purchase ... this way you will not need to make a Capital Call if the furnace goes out in the first 6 months of your ownership.

With these accounts set up ... simply transfer all Closing Table funds into the appropriate account.

AND whatever you do ... don't steal from your own Property!

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