Identifying a lucrative commercial real estate investment and spotting a bad one so that you can walk away from it requires determination and vast experience. Whether you are a seasoned real estate investor or just trying to make your first move in this arena, there is always a lot you need to learn. And if you inquire about the merits of commercial real estate investment, you will obviously receive a response explaining how commercial properties are way better than residential ones. As a commercial real estate owner, you will benefit from the economies of scale, enjoy additional cash flow, a relatively open investment field, and better returns on your investment.
With all that said, the challenge comes when you have to evaluate the best type of commercial property. What separates a hot commercial real estate deal from a poor deal? Just like a majority of real estate properties, success always begins with a perfect blueprint. Here is a blueprint that will help you land a commercial real estate deal like no other.
Learn Everything The Insiders Know
For you to be a big player in the commercial real estate field, you will need to think just like other commercial property owners. For instance, you will need to know that commercial property is often valued differently from residential real estate property. The amount of income you will get from a commercial real estate investment is proportional to the usable square floor area, which is a different case when it comes to individual homes. You will also have a bigger cash flow when you invest in commercial property. The math is pretty much easy: you will obviously generate more income on multifamily units as compared to a single-family unit. You must also know that commercial property leases usually last longer than those of single-family residences and this consequently paves way for a higher cash flow. Finally, if you find yourself in a tight credit spot, be sure to approach this kind of investment with some cash in hand. Most commercial property lenders will want to see that you have raised about 30% of the property’s value before they can approve your loan.
Set a Clear Plan of Action
When you want to secure a good commercial real estate deal, your priority should be to set parameters. For instance, you will need to ask yourself about the amount of money you can raise, shop around for mortgages so as to have an idea of the amount you will need to pay over the life of your mortgage. Tools such as mortgage calculators will help you come up with better estimates of the total cost of the commercial property you intend to purchase.
Some other important questions you will need to ask yourself include: What do you expect to get in return for the deal? Who are the crucial role players in the commercial real estate deal? How many tenants have already occupied the property and paying rent? What is the size of the rental space you will need to fill?
Learn to Spot a Good Deal
Some of the best commercial real estate investors can tell of a good deal when they spot one. Is it that they have some super minds or superpowers? Of course not. They possess a sharp, property owner’s eye that is always looking for any severe damage which could result in expensive repairs. They are aware of what it takes to assess all the risks and they will never hesitate to pull out their calculator to make sure that the property is in line with what they want.
Familiarize with Crucial Metrics in the World of Commercial Real Estate
Here are some of the most common metrics used when it comes to assessing commercial real estate property:
- Net Operating Income: With any commercial real estate property, the net operating income us usually calculated after an evaluation of the property’s initial year gross income and then subtracting all operational expenses incurred that year. The best real estate deal is one that has a positive net operating income.
- Cap Rate: The capitalization rate of any real estate property is usually used in calculating the value of all income-producing properties. For instance, smaller strip malls, commercial office buildings, and an apartment complex having more than five units could be ideal candidates for determining the cap rate. The capitalization rate is usually used to give an estimate of the present value of future cash flow or profits.
- Cash on Cash: Commercial property investors who bank on mortgages to buy their properties often utilize a formula (cash-on-cash) in order to make a comparison of the initial year performances of all competing properties. This approach looks at the idea that an investor does not need 100% of the cash to purchase the property at stake while also accounting for the fact that an investor will not retain all their net operating income since part of it must be used to settle mortgage payments.
Hunt for Motivated Sellers
Just like any other type of business, customers drive commercial real estate. Your task is to find them, particularly ones who are willing to sell their commercial property below the current market value. The truth is that nothing will happen or even matter in commercial real estate before you bag a deal, which will often be accompanied by motivated sellers. And this should be an individual with a pressing reason to sell their property below the current market value. If your property seller is not motivated, the chances are that they will not accept any negotiations.
Many people have always lived with the notion that finding and assessing property for sale in Cincinnati is all about getting a good price or sending out advertisements to attract motivated sellers. At the center of taking any action is simple human communication. It is all about building rapport and relationships with the property owners so that they will feel more comfortable when you are trying to secure a good deal and ultimately doing business with you.