Commercial real estate investing can be a worthwhile venture for those with the right experience or for those who hire a Commercial Finder. If you are a new to investing in Commercial real estate properties, there a number of factors that you should consider before investing, including the risks and benefits of the investment, the type of property you want to acquire, and the best way to protect your personal assets. Each type of commercial property brings with it challenges and it is best to surround yourself with experienced investors and professionals to help guide you through the process.
Ask any real estate professional about investing in commercial property and you’ll hear how such properties are more desirable than residential real estate. Commercial property owners enjoy the additional cash flow, the beneficial economies of scale, the relatively open playing field, the abundant market, and the bigger payoff from commercial real estate.
But how do you evaluate the best properties, and what separates the great deals from the bad?
Like most real estate properties, a successful start is with a good Plan. The following will help you evaluate a good commercial property deal.
To be a competitor in commercial real estate, learn to think like a pros do. For example, know that a commercial property has a valuation different from a residential property. Income on commercial real estate is directly related to its usable square footage. That’s simply not the case with residential properties. You’ll also see a bigger cash flow with commercial property. The math is simple: you’ll earn more income on an apartment building, for instance, than on a single-family home. Know also that commercial property leases are typically longer than on single-family residences. That provides the way for greater cash flow. Lastly, if you’re in a tighter credit situation, make sure to come to the table with cash in hand. Commercial property lenders like to see at least 30% down before they’ll issue a loan.
Setting guidelines is a top priority in a commercial real estate deal. How much can you afford to pay? How much do you expect to make on the deal? Who are the main players? How many tenants are already in place and paying rent? How much rental space do you need to fill or is the space rented to capacity with no more room to expand?
The top real estate professionals know a good deal when they see one. What’s their secret? First, they have an exit strategy – the best deals are ones where you know you can walk away from them. It helps to have an observant eye – always be looking for damage that requires repairs, know how to determine risks and make sure to bring your calculator to make certain that the property meets your financial objective.
The common formula to use for when assessing real estate include:
The NOI of a commercial real estate property is calculated by valuating the property’s gross operating income and then subtracting the operating expenses. You want to have positive NOI.
A real estate property’s Cap rate (Capitalization Rate), is used to calculate the value of income generating properties. For example, an apartment building, commercial office buildings, and smaller strip malls are all representative for a cap rate determination. Cap rates are used to determine the net present value of future profits or cash flow.
Commercial real estate investors who rely on financing to purchase their properties often follow the cash-on-cash formula to compare yearly performance of competing properties. Cash-on-cash takes the fact that the investor in question doesn’t require 100% cash to buy the property into account, but also accounts for the fact that the investor will not keep all of the Net Operating Income because he or she must use some of it to make mortgage payments. The calculation determines the cash income on the cash invested. Calculated as:
|Cash on Cash Return||Annual Dollar Income|
|Total Dollar Investment|
Like any business, customers drive real estate. Your job is to find them – specifically those who are ready and eager to sell preferably below market value. The motivated seller is someone with a pressing reason to sell below market value. If the seller isn’t motivated, he or she won’t be as willing to negotiate.
A great way to evaluate a commercial property is to study the neighborhood it’s located in by going to open houses, talking to other neighborhood owners, and looking for vacancies.
Be adaptable when searching for great deals. Use the internet, read the classified ads and a certified business brokerage to find you the best properties. Business brokerages can help you find valuable investment leads in exchange for a referral fee.
Finding and evaluating commercial properties is not just about farming neighborhoods or getting the price you want. It’s about building relationships and rapport with property owners so they feel comfortable talking about the good deals – and doing business with you. This is where a Business Brokerage has the advantage. They have already formed great relationships with sellers. The sellers trust them and know that they only bring qualified buyers to the table.
Before making that important decision on what to buy, entrepreneurs should pay heed to where they’re buying. Each local market has its own tax rates, land inventory and environmental issues. The supply of skilled labour in the area also needs to be considered. Municipalities can often provide helpful information on future industrial developments and environmental considerations.
Affordability is a big issue in commercial real estate, so before going to a bank, you should be working with an accountant to establish what your budget is. Bankers will want to see high quality financial statements and proof that the profits you generate will be retained by your company. All of this will play a part in determining whether you get the loan you need.
It’s also worth considering alternatives to conventional banks for financing. A bank may be willing to finance 65% of the capital needed but ask you to put up the remaining 35%—a substantial personal burden if a $1 million plus property is being purchased.
Tax implications can be complex in commercial real estate transactions. Find an accountant who knows the ins and outs of commercial investments. You may need to know, for instance, whether your purchase should be considered a corporate or personal transaction. Other issues include succession planning (a process for identifying and developing internal people with the potential to fill key business leadership positions in the company), transition financing and decisions about how assets will be broken up when the business is sold.
Whether it’s an existing building or one that you’ll be renovating, you’ll need a layout that gives you a competitive advantage. The right layout can lower operating costs and improve your capacity to produce new products as well as your ability to produce higher quality goods. A plant’s layout has a major impact on its operational efficiency, optimize processes and reduce waste, and although some may be reluctant to make further changes on layout after a costly purchase, they usually see a payback quickly when they make that extra investment.
It’s a fact! It is not easy to buy, sell, lease or manage commercial real estate properties without the help of an expert. Would you go to court without a lawyer? Then why would you buy a commercial property without an expert representing you?
Hiring a reputable licensed commercial real estate agent or business broker is your best defence from losing thousands of dollars when you make costly mistakes, or miss out on solid commercial real estate investing opportunities.
That is why finding and hiring the right commercial real estate agent or business broker is paramount. This critical choice can make or break your commercial real estate venture. As important as these issues are, there is simply much more to a reputable commercial real estate agent than finding the right property and negotiating the deal terms.
This agent/business broker should be your partner for all matters concerning commercial real estate acquisitions, especially pertaining to the original transaction that this agent made with you. If your agent can’t perform these services because their knowledge is limited or they don’t want to take the time to do so for you, it would be in your best interest to find one that can.
Most agents do not have the full knowledge required to represent you effectively, so be careful to choose the right agent/business broker. Too many agents choose to do business “transaction” based instead of “relationship” based. Check references to find out if your prospective agent/business broker gives good follow up service throughout the terms of your sale or lease and has the knowledge and resources to do so. Choosing the wrong agent now can cost you money, time and headaches later.