How to Find a Smoking Hot Commercial Real Estate Deal
In 2008, the economy saw commercial real estate prices plummet by more than 10-percent. Savvy real estate investors are now on the scene, recognizing that these lower-than-average commercial property values make excellent investment opportunities.
A recent study conducted by Marcus & Millichap Real Estate Investment Services shows that nearly 51-percent of commercial real estate investors anticipate increasing their commercial real estate holdings over the next several years.
Commercial real estate offers substantial benefits, including increased cash flow and bigger payoffs. This guide highlights step-by-step advice, guiding investors towards making secure investments and straying away from commercial properties that could result in financial ruin.
- Learn – A primitive step to becoming an expert in any field is learning. Commercial real estate investors need to familiarize themselves with the commercial real estate industry. Vastly different from residential real estate, commercial property values are based on usable square footage. With substantially bigger cash flows, commercial properties earn more money than standard single-family residences. While most lenders require 30-percent down payments, commercial leases are generally longer in duration than residential homes.
- Action – Investors first need to determine what they can afford to invest. Expectations related to cash flow, rent values and space requirements are essential components in having successful income producing commercial properties.
- Good Deals – Recognizing a good deal is vital, but having an exit strategy is even more important. Successful real estate investors can see the difference between potential and a money pit. Assessing risk and the ability to spot expensive repairs is an essential component to becoming a successful commercial real estate investor.
- Key Terms– Operating on a different playing field than residential properties, commercial real estate has its own select key terms.
- Net Operating Income (NOI) – Allowing investors to calculate profits, this term includes the value of the property’s first year of gross operating income by subtracting all operating costs within the same year. To determine if a property is a good investment, this number should be positive, never negative.
- Cap Rate – The capitalization rate determines the value of income producing commercial properties.
- Cash on Cash – This allows for similar comparisons of other like properties. Taking into account NOI and mortgage payments, this term offers a more comprehensive view based on income-to-debt ratios.
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