Commercial Real Estate
Commercial real estate is a broad term describing real property used to generate a profit. Examples of commercial real estate include office buildings, industrial property, medical centers, hotels, malls, farmland, apartment buildings, and warehouses.
Finding a Good Commercial Real Estate Deal
Ask any real estate professional about investing in commercial property and you’ll hear how such properties are more desirable than residential real estate. Commercial property owners enjoy the additional cash flow, the beneficial economies of scale, the relatively open playing field, the abundant market, and the bigger payoff from commercial real estate.
Draw up a plan of action
Setting guidelines is a top priority in a commercial real estate deal. Commercial real estate investing can be a worthwhile venture for those with the right experience or for those who hire a Commercial Agent. If you are new to investing in Commercial real estate properties, there are several factors that you should consider before proceeding, including but not limited to the risks and benefits of the investment. Each type of commercial property brings with it challenges so it is best to surround yourself with experienced investors and professionals to help guide you through the process.
- What kind of property are you looking for?
- Are you looking to use the building for your own business, rent it out, build equity, and/or something else entirely?
- What kind of location do you need?
- Do you need to buy, or could you lease the property? nt it out, build equity, and/or something else entirely?
- What’s your situation regarding cash, financing, and/or ability to make a down payment?
- What’s your risk tolerance?
- How much time can you commit to the property?
- How much work are you willing to put into the property?
- Finally, are you ready and willing to make an investment/purchase of this size?
Get Familiar with Key Commercial Real Estate Metrics
The common formula to use when assessing commercial real estate include:
Net Operating Income
The NOI of a commercial real estate property is calculated by evaluating the property’s gross operating income and then subtracting the operating expenses. You want to have positive NOI.
A commercial real estate property’s Cap rate (Capitalization Rate), is used to calculate the value of income-generating properties. For example, apartment buildings, commercial office buildings, and smaller strip malls are all representative of a cap rate determination. Cap rates are used to determine the net present value of future profits or cash flow.
Cash on Cash
Commercial real estate investors who rely on financing to purchase their properties often follow the cash-on-cash formula to compare the yearly performance of competing properties. Cash-on-cash takes the fact that the investor in question doesn’t require 100% cash to buy the property into account, but also accounts for the fact that the investor will not keep all of the Net Operating Income because he or she must use some of it to make mortgage payments. The calculation determines the cash income on the cash invested. Calculated as:
- Cash on Cash Return
- Annual Dollar Income
- Total Dollar Investment