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Talk to any seasoned commercial property owner and they’ll bore you about the incredible cash flow, the lack of real competition, and the plentiful amount of affordable property managers. Rarely, do you hear about the journey to get there. Buying commercial real estate is a complex undertaking that can be challenging for even the experts to time right to maximize their investment value. The road can be disappointing, costly, and downright stressful when you’re at the whims of the market and ever-fluctuating demands. Here are a few guidelines and tips to help you understand the world of commercial real estate.
Call in the Experts
Chances are, if you’re reading this introductory guide to commercial real estate, you not an expert—yet. That’s why it’s important to surround yourself with pros who can help you determine timing, location, and can even negotiate and close deals on your behalf. Here’s a few experts that are good to have in your corner when you begin to embark on a commercial real estate deal:
- Lawyer: Necessary to complete the transaction. Can negotiate on your behalf.
- Accountant: Necessary to figure out what you can afford and analyze the tax and operating budget benefits.
- Commercial broker: Necessary to identify potential properties you can afford.
- Mortgage broker: Necessary to help organize and determine financing options.
Know Your Metrics
There are a few common ways to measure real estate value, including:
Net Operating Income (NOI): The NOI of a commercial property is calculated by taking the property’s first year gross operating income and then subtract any operating expenses for that first year.
Cap Rate: A property’s “cap” (or capitalization) rate, is used to determine the value of income producing properties. The cap rate is the Net Operating Income (NOI) to property value. For example, if a property was listed for $1,250,000 and generated an NOI of $150,000, then the cap rate would be: 8.33%
Hunt for Properties
Let’s face it—nothing matters in real estate until you find a deal, ideally accompanied by a motivated seller. Once you find the place, there’s a number of factors to consider—the most vital being location, location, location, of course. The old adage rings just as true for commercial real estate as it does for residential. In addition, consider. . .
The Condition: Consider how the property was used, the wear-and-tear, and any potential environmental hazards or liability issues, such as lead paint or asbestos.
Any Limitations: Check into zoning restrictions, building codes, and covenants forbidding changes or alterations to the property. It’s also wise to look into any limitations around parking and handicap access.
Put the Experts to Work
Now that you’ve identified a potential commercial property, call in your team of experts to help with the due diligence. Brokers can help arrange appraisers, environmental analysts, and engineers to verify the condition of the property, it’s prior use, and any liability issues. Your title company can ensure there are no prior or existing insurance claims or litigation threatening the property. Your accountant can help you formulate the best financial methods to not only capture seller’s attention, but also can feed lawyers crucial bits of information that can save big money during negotiations. Your accountant and attorney are also vital to the process as they both play critical roles to ensure contracts are sufficiently detailed, and structured to your advantage. Too often, rookie commercial real estate investors fail to envision relatively common contingencies and wind up taking a huge financial hit.
Cultivate the Relationships
Similar to residential real estate, commercial real estate success is based on relationships. At the center of every commercial real estate deal is basic human communication. Keep building rapport with property owners, never burn bridges in the wake of a crumbled deal, and always remain professional. Solid relationships within individual phases of each project can result not only in successful, profitable projects but also can help you find your next big opportunity.