Are you interested in investing in commercial property? The truth is, whether you are an investor, broker, contractor, or mortgage lender, there are a lot of facts you have to learn about commercial property investment. Suppose you ask any real estate professional about the fruits of investing in commercial property. In that case, they are likely to trigger you to rush for commercial real estate and overlook the residential real estate.
For instance, there is plenty of cash flow, beneficial economies of scale, an open playing field, and plenty of property managers. But the question is, how do you analyze commercial property? How to identify a real deal from other duds?
Commercial property investment is increasing, and many investors are ready to put their money in. As the investors continue to discover the advantages of shifting to commercial real estate, they also learn to differentiate between CRE and other financial sectors. The good news is that analyzing commercial real estate is not as hard as it may sound. You only need to understand the basics and how to get started. Therefore, to get a real deal in commercial property, here are a few tips to get you started.
What Is Commercial Property?
The rental market is a lucrative platform where you can win millions of dollars in a short time. You can invest a few dollars and let the property pay you with a steady cash flow. However, there are different ways to invest in the rental market. For you to get a lucrative property to invest in, you must understand what is commercial property. Commercial property is real estate used for business activities. They include shopping malls, industrial estates, grocery stores, office spaces, and many more. Their differences with the residential real estate are how they are financed, taxed, and law implications.
How to Evaluate Commercial Properties
Most investors rush to grab the property by looking at the numbers only. They want to seize the opportunity and analyze the expense statement immediately they are presented with the deal without taking time to compare other opportunities next door. Doing this, you risk falling into hands of fake deals or expensive property with high repairs and maintenance costs. You may be using cap rate, cash-on-cash, or gross multiplier to get the deal.
However, for you to determine if the property is worth your money and will pay you reliable returns, here are a few tips to analyze the property;
Understand the Market
Understanding the real estate market before venturing is the key to successful deals. Before buying or signing up for the deal, take your time to survey the location of the property. Many investors make the mistake of conducting everything in the offices and do not visit the site to understand the property’s fundamentals. Learning the market gives you a clear picture of the vacancy rate, construction costs, the rental growth rate, and compare prices of other properties in the area.
Additionally, learning the real estate market before investing gives you a firm grasp of the economic and real estate factors such as job and population growth, and major industries in the area. This simplifies the calculation of your possible returns and cash flow.
Use A Competitive Property Manager
The kind of property management team you choose can make or break your commercial property investment. You can choose to buy the property and manage it yourself, hire a property manager, or keep the existing manager. You can also use an outside property management team, especially in group investment.
However, whichever way you choose to go, remember certain factors in property management you have to consider. For example, a successful property management team is responsive to tenants’ requests, adapts to the new market changes, and effective at providing the essentials to the tenants. The property manager should also use cost-effective measures and work closely with property owners to attain tenants’ satisfaction while remaining within the budget.
Learn What the Pros Know About Commercial Property
For you to succeed in commercial property investment, think and act like a professional. You might be new to the game, but don’t let the insiders intimate you with dud deals. Before thinking about signing for a new deal, ask yourself what you know about commercial property? How can you deal with tenants? How can you handle taxable incomes and government regulations? Learning to answer these questions makes you pro even when you are a new investor in the market.
Therefore, you should know that commercial property is rated differently from residential property for you to act like an insider. This is because commercial property is evaluated based on its usage of square footage. You will realize a significant cash flow with commercial property depending on its size and vacancy rates. Most importantly, you are likely to win a better deal in a tighter environment when you knock on the door with at least a 30% down payment, paid in cash before thinking about loans.
Familiarize Yourself with The Real Estate Metrics
Acting like a long-term investor in commercial real estate means you should know all the metrics used to evaluate the property. Familiarizing yourself with the rental market gives you the best deal and prevents you from buying a depreciating property. The common metrics used in the real estate market are;
- Net Operating Income (NOI): The Net Operating Income is calculated by assessing the first year’s gross operating income minus operating expenses.
- Cap Rate: Cape rate is used to evaluate the value of income-producing properties. The rate is used to determine the net present value for future profits or cash flow by capitalizing earnings.
- Cash on Cash: Cash-on-cash enables the investors to pay less than 100% when buying the property to their account and stands for the investor who will not keep all the NOI because they must use some of it to finance a mortgage.
Final Words
Commercial property evaluation is a complex idea, especially if you are a new investor because you must understand the fundamentals before getting started. However, with the right links, getting a reliable property becomes an easy task. Remember, finding the right investment plan is not just about visiting the market, looking for an affordable price, or sending out signals to attract sellers. Learn to communicate with the existing investors and sellers who feel comfortable talking to you about the best deals. In case you want to start investing in commercial property, get the basics from Bugis Credit.