7 Steps to a Hot Commercial Real Estate Deal

Ask any real estate specialist about the benefits of investing in commercial property, and you'll likely provoke a monologue on how such assets are a better value than residential real estate.

Commercial property owners embrace the increased income flow, the positive economies of scale, the relatively open playing field, the large market for excellent, inexpensive property managers, and the prospect for a possibly higher reward from commercial real estate.

But how can you evaluate the greatest properties? And what differentiates the amazing offers from the duds?

1. Learn What the Insiders Know

• To be a player in commercial real estate, learn to think like a professional. For example, recognize that commercial property is valued differently than residential property. Income on commercial real estate is closely tied to its useable square footage.

• That's not the situation with individual residences. You'll also experience a higher cash flow with commercial property. The arithmetic is simple: you'll generate more revenue on multifamily residences, for instance, than on a single-family house. Know too that commercial property leases are longer than on single-family houses.

• That paves the path for more cash flow. Lastly, if you're in a tougher credit situation, make sure you come knocking with cash in hand. Commercial property lenders prefer to see at least 30% down before they give a loan the green light.

2. Map Out a Plan of Action

• Setting parameters is a major consideration in a commercial real estate purchase. For example, ask yourself how much you can afford to pay and then shop around for mortgages to get an idea of how much you will spend throughout the term of the mortgage. Using tools like mortgage calculators can help you establish excellent estimations of the entire cost of your property.

• Other critical things to ask yourself include: How much do you expect to profit on the deal? Who are the major players? How many renters are already on board and paying rent? How much rental space do you need to fill?

3. Learn to Recognize a Good Deal

• The greatest real estate experts know a good deal when they see one. What's their secret? First, they have an exit strategy: The best bargains are the ones you know you can walk away from.

• It pays to have a sharp, landowner's eye—always be searching for damage that requires repairs, know how to assess risk, and make sure to bring out the calculator to confirm that the property matches your financial goals.

4. Get Familiar With Key Commercial Real Estate Metrics

The main key metrics to utilize when analyzing real estate include:

• Net Operating Income (NOI): The NOI of a commercial real estate property is computed by analyzing the property's first-year gross operating income and then deducting the operating costs for the first year. You want to have positive NOI.

• Cap Rate: A real estate property's "cap"—or capitalization—rate is used to assess the value of income-producing assets. For example, an apartment complex of five units or more, commercial office buildings, and smaller strip malls are all ideal candidates for a cap rate assessment. Cap rates are used to determine the net present value of future profits or cash flow; the technique is also termed capitalization of earnings.

• Cash on Cash: Commercial real estate investors that rely on loans to acquire their properties generally adhere to the cash-on-cash formula to assess the first-year performance of rival assets. Cash-on-cash takes the fact that the investor in issue doesn't require 100% cash to buy the property into account, but also accounts for the reality that the investor will not keep all of the NOI since they must spend some of it to make mortgage payments. To find cash on cash, real estate investors must identify the amount necessary to invest to acquire the property or their original investment.

5. Look for Motivated Sellers

• Like any business, consumers drive real estate. Your duty is to discover them—specifically, those who are ready and eager to sell below market value.

• The reality is that nothing occurs or really counts in real estate unless you locate a bargain, which is generally accompanied by a motivated seller. This is someone with an urgent cause to sell below market value. If your vendor isn't motivated, they won't be as willing to negotiate.

Read Also: Commercial Real Estate in NYC

6. Discover the Fine Art of Neighborhood "Farming"

• An good strategy to analyze a commercial property is to research the community it's located in by visiting to open houses, chatting to other neighborhood owners, and checking for vacancies.

7. Use a "Three-Pronged" Approach to Evaluate Properties

• Be adaptive when hunting for amazing discounts. Use the Internet, read the classified ads, and hire bird dogs to find you the greatest properties. Real estate bird dogs can assist you locate good investment leads in exchange for a referral fee.

What Is the Meaning of Commercial Real Estate?

Commercial real estate is properties utilized for commercial reasons as opposed to residential or industrial uses. This might include shopping malls, office buildings, hotels, and warehouses. Most commercial real estate is leased by tenants for a period of time when they set up their business and utilize the property to produce cash. Commercial real estate can also be acquired and sold for capital appreciation.

Can You Invest in Commercial Real Estate?

Yes, you may invest in commercial real estate—there are various methods to do it. You can invest through direct ownership, meaning you will acquire a commercial real estate property. You may rent it out and hold it for capital appreciation. You can invest in real estate investment trusts (REITs), which are corporations that pool together cash from different investors and invest in commercial real estate holdings. Crowdfunding platforms are also available for consumers to pool money and acquire houses.

What Is the 2% Rule in Real Estate?

The 2% rule in real estate asserts that a property is profitable if the monthly rental revenue is at least 2% of the purchase price. For example, if a property was acquired for $500,000, it would need to produce a monthly rental revenue of at least $10,000 (500,000 * 0.02) to be deemed profitable.

The Bottom Line

By and large, discovering and appraising commercial properties is not only about cultivating neighborhoods, getting a fantastic deal, or putting out smoke signals to draw sellers to you. At the heart of taking action is simple human communication. It's about creating relationships and rapport with property owners, so they feel comfortable talking about the excellent deals—and doing business with you.