If you are looking for a great investment, commercial real estate is worth looking into. Buying commercial real estate is not like buying residential real estate and there are things you need to do and think about before you make the plunge.
Start by talking to experts. If you are serious about buying commercial real estate, you need to get advice from experts in commercial real estate. When doing valuations of property, commercial real estate is looked at and treated very differently than residential property. The value of commercial real estate is often tied to the amount of space that can be used for the business. The leases are longer for commercial properties than for residential ones. this means the cash flow is greater. When buying commercial real estate, you will need to put more money down than if you were buying a home.
1. Develop a road map for your plan. Having a plan of attack for your commercial real estate investments is important. This should include a budget. You need to know what you can afford to buy and how much cash you have on hand to buy it with. Look into how much you can realistically expect the investment to pay, who you will approach to ask for help financing your commercial real estate deal and how much of the space is full vs. how much needs to be filled.
2. Learn how to distinguish between good and bad deals. Some people seem to have a sixth sense when it comes to buying commercial real estate. Many have a hawk’s eye. They can suss out problems with potential real estate deals such as properties that need expensive repairs and can see what risks come along with some commercial real estate properties. While it is important to recognize potential problems and pitfalls, this is not why they are good at what they do. They always have a plan b. They know that often the best and most profitable commercial real estate deals are the ones that you can leave on the table.
3. Learn the lingo of commercial real estate. Like every industry, the commercial real estate world has its own language. You need to know the following terms:
- Net Operating Income (NOI): You calculate the value of a commercial real estate property by taking its gross operating income for the first year and subtract all expenses used to operate the business for that same time frame. The higher that final number, and it should be a positive integer, the better.
- Cap Rate: This is also called the “capitalization rate.” For properties that produce income, this is used to calculate their value. Small strip malls, apartment buildings with five apartments or more, and commercial office spaces are all good candidates for this kind of valuation. The net present value of any future cash flow or profits can be estimated with this value.
- Cash on cash: Many people and companies who make investments in business real estate do so with financing. They need to use this formula to compare the performance of multiple properties. This method considers the facts that the investor will need all of the NOI to make payments on the property and the fact they will not buy the property will all cash.
4. Have an open mind when looking at commercial properties. When you are buying commercial real estate, you never know where you are going to find a great deal. You should look online, read the paper and just keep your eyes peeled when you are out and about. Do not be afraid to look at different types of commercial real estate properties to buy. Consider going bigger. If you are considering buying an apartment building, remember that a ten unit building is not any more challenging to run than one with five. The former will bring you a lot more revenue. Be open to different kinds of properties. Consider hotels, office parks and strip malls. You may find a better deal when you keep your eyes peeled and your mind open.
Do your due diligence and you will should be successful with your commercial real estate investments.