Starting To Invest In Commercial Real Estate? Here Are Some Tips.

It seems many folks think Real Estate is the easiest way to get rich quick. Is it? Have you dabbled? Have you lost or won? Here’s some questions to ask yourself and thoughts to consider in getting started…

How do I find a Good Commercial Real Estate Deal?  

If you ask most real estate professionals about the benefits of investing in commercial property, you’ll probably hear that commercial is a better investment than residential real estate. When a commercial investment is structured well, owners will tell you the additional cash flow, the abundance of available property to buy, and affordable property managers help make these deals attractive.

But how do you evaluate the best properties? And what separates the great deals from the duds?

Success starts with a good blueprint and a proper plan. And keep the emotions out of it. Remember this is an investment, not your dream home!

Learn What the Insiders Know

To be a player in commercial real estate, ya gotta learn to think like an investor. For example, commercial property is valued differently than residential property. Income on commercial real estate is directly related to its usable square footage and the revenue it could generate. That’s not the case with individual homes. Typically you’ll see a bigger cash flow with commercial property. The math is simple: you’ll earn more income on multifamily dwellings than on a single-family rental or flip. Commercial property leases typically are longer than those on single-family residences which paves the way for greater cash flow over the long term. In a tighter credit environment like we’ve seen recently, make sure to come knocking with cash in hand. Commercial property lenders like to see at least 20-30% down before they’ll consider your deal. Don’t have your own cash? Consider a pool of investors, but be prepared to give up some of the control.

1. Have a Plan
   Give thought to:
   • Setting parameters.
   • How much can you afford to pay?
   • How much do you expect to make on the deal? Short and long term.
   • Who are the key players? Depending on the size of the property, understand who all must agree to your proposal and why.
   • How many tenants are already on board and paying rent? Check out the existing leases, their expiration date and maybe even interview the tenants to see if they plan to stay or leave.
   • How much rental space do you need to fill? It’s all about the cash flow!
2. Recognize a the Warning Signs
   How do you know if you’re looking at a good deal?
   • Have an exit strategy – the best deals are the ones where you know you can walk away from.
   • Keep your eyes open – look for damage that requires repairs, know how to assess risk and make sure to break out the calculator to ensure that the property meets your financial goals.
   • Bring in a professional to look with you and if necessary, hire a contractor to tour the property with you for his or her opinion.
3. Get Familiar With Key Commercial Real Estate MetricsHere are some of thecommon key metrics to use for when assessing real estate include:
   • (NOI)
     The NOI of a commercial real estate property is calculated by valuating the property’s first year gross operating income and then subtracting the operating expenses for the first year. You want to have positive NOI. If the Seller can’t produce good records of income and expenses, and you can’t project on your own, walk away.
   • 
     A real estate property’s “cap” – or capitalization – rate, is used to calculate the value of income producing properties. An apartment complex of five units or more, commercial office buildings, and smaller strip malls are all good candidates for a cap rate determination. Cap rates are used to estimate the net present value of future profits or cash flow; the process is also called capitalization of earnings. Consult your accountant or Realtor familiar with these calculations.
   • 
     If you’re going to rely on financing to purchase a property, the cash-on-cash formula may help to compare first-year performance of competing properties. Cash-on-cash takes the fact that the investor in question doesn’t require 100% cash to buy the property, but also accounts for the fact that the investor will not keep all of the NOI because he or she must use some of it to make mortgage payments. To uncover cash on cash, real estate investors must determine the amount required to invest to purchase the property, or their initial investment. Please always consult your accountant for best understanding of these types of comparisons.

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5. Look for Motivated Sellers
   
   
6. Your job is to find them. A good deal requires a motivated seller who would consider your offer below market or with some creative terms. If your seller isn’t motivated, he or she won’t be as willing to negotiate.
7. Discover Neighborhood “Farming”
   A great way to evaluate a commercial propertyis to study the neighborhood it’s located in by going to open houses, talking to other neighborhood owners, and looking for vacancies. This will work well for residential properties, but may not be as effective for commercial buildings. It’s always wise to understand the neighborhood on any real estate transaction.
8. 
   
9. Evaluate Properties from multiple sources
   
   
10. Be adaptable when searching for great deals: Use the internet, read the classified ads and hire bird dogs to find you the best properties. Realtors who specialize in or are active in commercial real estate will gladly work with you to find and prepare your offer to purchase

The Bottom Line is that finding and evaluating commercial properties is not just about farming neighborhoods, getting a great price, or sending out helpers to bring sellers to you. It’s all about basic human communication. It’s about building relationships and rapport with property owners so they feel comfortable talking about the good deals – and doing business with you.

Still feeling uncertain? Try joining groups of investors who are willing to help and guide you. This site is an excellent source, for example.