Ask any property guru about their two cents on investing in commercial estate and the odds are that you will trigger an elaborate monologue on how these properties make for a better investment option as compared to residential properties.
The best part is that they are not wrong. Many factors – including easy availability of commercial real estate loans, additional cash flow, advantageous economies of scale, comparatively open playing field, a huge market for effective and inexpensive property managers, and bigger ROI – turn commercial estates into a better bet from an investment perspective.
Because of these reasons, commercial real estate has long been a key part of our investment portfolio. However, things do not always go as planned; similarly, every investment in real estate does not offer the monstrous returns which the investors hoped for. There have been many instances where real estate investments have turned sour for the investors.
However, that only happens when the investments are made without a thorough evaluation. This means that one should meticulously analyze all the key factors before making a move in the commercial real estate.
But how can you evaluate the available options? And what techniques can be employed to identify a good deal from a dud? Well, for starters, a detailed blueprint sounds like a good option. Here is one that can help you in this ordeal.
1. Map Out an Action Plan
Setting parameters is one of the top priorities of a real estate deal. For instance, you need to figure out how much you can afford to pay, then accordingly start looking around for mortgages to get an estimate of how much you will have to pay over the life of the loan.
In addition to this, you also need to consider a few other things like how much do you expect on making this deal, what is the occupancy rate, how much rental space do you need to fill, and so on. The answers to all these questions will tell you if the deal is viable or not.
2. Learn What the Insiders Know
If you want to make it big in commercial real estate, then you should learn to think like a pro. For instance, you must be aware of the fact that commercial and residential properties are valued differently. Income from a commercial property directly depends on its usable area, but that's not the case with a residential unit.
The cash flow from commercial properties is also a lot bigger than that of their residential counterparts. It is pretty simple: you earn more from a multifamily dwelling than a single-family unit. Also, leases for commercial estates are longer than single-family residences. This paves way for a healthier cash flow.
Lastly, if you don’t have plenty of cash, you can always secure a loan. However, keep in mind that most lenders would need at least 30% down for accepting your loan request.
3. Get a Hang of Commercial Real Estate Metrics
There are many metrics used for assessing real estate. Some of them include:
• Net Operating Income (NOI)
The Net Operating Income of a property can be easily calculated by subtracting its operating expenses from its gross operating income. A positive NOI is what you want.
• Cap Rate
The value of a property depends on its NOI. The more money a building generates after deducting all the expenses, the more its worth. Simple and fair, isn’t it? Usually, a commercial estate is worth 8-10 times its yearly NOI. This multiplier is considered as property’s Cap Rate.
Real estate investors who count on Commercial Real Estate Loans to buy properties often stick to the cash-on-cash formula to contrast the first-year performance of all the available options. This approach is based on the fact that the investor in question will use credit to buy a property, and then use it to make the mortgage payments. This enables the investors to find out if a property is worth their time and money or not.
4. Learn to Identify a Good Deal
Top property investors know a good deal when they see one. Do they have some secret superpowers? Probably not. They have a sharp, landowner's eye which is always on the lookout for any severe damage that could require costly repairs.They know how to assess risk and never fail to break out the calculator in order to ensure that the property fills all the right boxes.
5. Look for Motivated Sellers
Just like any other business, customers take the driving seat in real estate. You just need to find those individuals who are eager and ready to sell a property below its market value. Once you find such a motivated seller, you find your hot deal. But if the seller is not motivated, you might have a hard time negotiating a fair price.
These 5 steps will help you to zero-in on the right property and build wealth. All you need to is try and establish a relationship and rapport with the property owners, this will induce them to lower their guard and offer you an amazing deal. For more information on Commercial Real Estate Loans in California, contact us!