Starting in 2008, commercial real estate took a nosedive with values dropping by 10.6 percent during the fourth quarter alone. That decline was the biggest recorded in 24 years. While this was devastating to some, experienced investors know that when prices are low, genuine investment opportunities are often revealed.
As an example, of the 1,129 commercial property investors, 51 percent expected to increase allocations for commercial real estate during the credit crisis of 2008, according to a survey conducted by Marcus & Millichap Real Estate Investment Services.
Therefore, even when there was a major drop in plans for acquisitions starting in 2005 at the peak of commercial real estate, more than half of the investors planned to increase holdings. In comparison, for 2009 portfolios, only 11 percent planned a reduction. There are many benefits associated with commercial real estate investment, including cash flow, nice playing field, economies of scale, bigger payoff, and affordable managers.
However, to be successful in commercial real estate, you need to know how to separate yourself from the competition and the right way to evaluate the best properties. The following seven steps will help in determining whether a deal is really good or not.
Identifying a Great Deal
- Insider Information – To be a big-time investor in commercial real estate, it is essential to learn what insiders know. As an example, commercial and residential real estate are valued differently; income is based on usable square footage for the commercial market. As such, cash flow is much bigger. In addition, leases for commercial property are longer, which also equates to greater cash flow.
- Plan of Action – Another top priority involves setting parameters. You must know how much can be afforded, the amount that can be made on each deal, who all of the primary players are, the number of current tenants and what they pay for rent, available space for lease, and so on.
- Spotting a Great Deal – You need to spot great deals, as well as those that should be passed over. To accomplish this, you need to assess the risks, identify any needed repairs, and carefully calculate the property’s potential.
- Learn Key Metrics – When assessing commercial real estate, there are primary metrics to learn, such as Net Operating Income, Cash on Cash, and Cap Rate.
- Finding Sellers Who are Motivated – In real estate, customers are what drive business. Therefore, you need to find motivated sellers who are willing to sell below market value. Often, finding a deal comes with a motivated seller.
- Neighborhood Farming – To evaluate commercial real estate, the neighborhood should be studied. This can be done by talking to owners of other properties, attending open houses, and watching for vacant buildings.
- Adaptable Approach – When looking for great deals, be adaptable. Classified advertisements, the Internet, and hired property searchers are great examples of locating fantastic investment leads.
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