If you were to ask a real estate professional about the advantages of investing in commercial property, it is highly probable that you would activate a lengthy discussion about how these properties offer superior benefits compared to residential real estate.
Commercial property owners appreciate the extra revenue, the advantageous economies of scale, the relatively unrestricted competition, the plentiful market for competent and economical property managers, and the opportunity for a potentially larger profit from commercial real estate.
However, how can you assess the most valuable properties? And what distinguishes exceptional bargains from poor ones?
1. Learn what the insiders know
In order to be involved in the field of commercial real estate, it is important to develop a professional mindset. This includes understanding that commercial property is assessed differently compared to residential property. The earnings generated by commercial real estate are directly linked to the usable area it possesses, whereas this is not the case with residential homes. Additionally, commercial property tends to yield higher cash flow.
Firstly, it is important to understand that multifamily dwellings generally yield higher income compared to single-family homes. Secondly, it should be noted that leases for commercial properties tend to be longer than those for single-family residences.
Firstly, this creates an opportunity for increased cash flow. Additionally, when faced with stricter credit conditions, it is essential to have cash readily available. Commercial property lenders typically require a minimum down payment of 30% before approving a loan.
2. Map out a plan of action
When engaging in a commercial real estate deal, one of the foremost concerns is establishing parameters. To illustrate, consider determining your affordability and subsequently exploring various mortgage options to ascertain the total cost over the mortgage’s duration. Employing tools such as mortgage calculators aids in formulating accurate approximations for the overall expenditure of your property.
When thinking systematically, consider other important inquiries such as: What is your anticipated profit from the transaction? Who are the main individuals involved? How many tenants have already joined and started paying rent? What is the amount of rental space that needs to be occupied?
3. Learn to recognize a good deal
The secret of the top real estate professionals is their ability to recognize a lucrative opportunity. How do they do it? Well, they start by having an exit strategy, as they understand that the most favorable deals are the ones they are willing to forgo. Additionally, having a keen eye for potential issues that may necessitate repairs, evaluating risks, and crunching the numbers on a calculator to ensure the property aligns with their financial objectives, all contribute to their success.
4. Get familiar with key commercial real estate metrics
When assessing real estate, the key metrics commonly used are:
To calculate the Net Operating Income (NOI) of a commercial real estate property, first assess the gross operating income for the first year, and then deduct the operating expenses for the same period. It is desired to achieve a positive NOI.
The cap rate is utilized in determining the worth of income-generating properties, by evaluating the property’s capitalization rate.
Cap rate determination can be applied to an apartment complex with five units or more, commercial office buildings, and smaller strip malls. The purpose of calculating cap rates is to estimate the net present value of future profits or cash flow, also known as capitalization of earnings.
Commercial real estate investors who depend on financing to acquire their properties commonly utilize the cash-on-cash formula to evaluate and compare the initial year’s performance of competing properties.
When calculating cash-on-cash, real estate investors must consider that they do not need to bring 100% cash to purchase the property, but they also need to consider that they won’t be able to keep all of the NOI as they need to allocate some of it for mortgage payments. To calculate cash on cash, investors must determine the initial investment or the amount needed to buy the property.
5. Look for motivated sellers
Just like any other business, real estate is driven by customers. Your task is to locate those customers who are prepared and enthusiastic about selling at a price below the market value.
Until a deal is found in real estate, nothing occurs or holds significance. A deal typically involves a motivated seller, who has a compelling reason to sell below market value. If the seller lacks motivation, they will be less inclined to engage in negotiations.
6. Buy the amount of commercial space that reflects market demand
Entrepreneurs often face the temptation of purchasing excessive commercial space, but succumbing to this can impact the future marketability of the property.
According to Brett Prikker, Major Accounts Manager at BDC, if you purchase a larger building, the number of potential buyers interested in the property when you sell will decrease. Since most Canadian businesses are small enterprises, they do not require large spaces to accommodate their needs.
In general, when purchasing property that exceeds 50,000 square feet, there is a reduced number of potential buyers. This is due to the fact that such properties are less sought after in the market, as they are considered unaffordable for the majority of entrepreneurs and more challenging to sell.
7. Place your commercial real estate acquisition into a separate holding company
Dan LaBossière, an Assistant Vice President at BDC in Winnipeg, who has assisted numerous entrepreneurs in the planning and financing of lucrative real estate purchases, advises that it is advisable to establish a separate holding company for commercial real estate, apart from the operating business.
According to LaBossière, thinking step by step, rephrase the given text while keeping the same meaning without adding or removing any information: The ability to sell your business smoothly can be enhanced, as LaBossière explains, as numerous buyers may prefer to purchase solely the operating company. This can lead to a more cost-effective acquisition for some and can also simplify the process of relocating your operations to a different part of town or another city for others.
Additionally, this allows for the entrepreneur to retain ownership of the real estate, thus enabling them to generate income for their retirement even after selling the business.
8. Invest in a building with world-class green certification (LEED)
Leadership in Energy and Environmental Design (LEED) certification offers a third-party verification to confirm that a building, home, or community has been constructed and designed with strategies that prioritize achieving exceptional performance in various important aspects. These aspects include human and environmental health, sustainable site development, water conservation, energy effectiveness, materials selection, and overall indoor environmental quality.
One option to consider is the purchase of a brand-new building or the renovation of a pre-owned building that has been certified with LEED, as these choices have the potential to enhance the value of the property.
Entrepreneurs who search for LEED-certified buildings or remodel properties might initially incur higher expenses. However, these costs can be recovered by enhancing energy efficiency and boosting employee productivity through improved air quality and design.
Prikker suggests considering supplementing financing for LEED certification with subsidies and grants, given the higher costs. Finding a balance between being a good corporate citizen and ensuring financial viability is crucial.
He suggests considering green initiatives that are more affordable than obtaining LEED certification, such as the addition of a green roof or improvement of the air quality system.
According to Prikker, we are just starting to witness the adoption of these green standards in the market, but eventually they will become the standard. However, he advises that it is crucial to have realistic expectations. Prikker explains that the costs of implementing these standards do not automatically translate to the investment’s value. There will always be the hurdle of recovering those costs.
9. Work with an experienced commercial real estate broker
According to Prikker, it is common for entrepreneurs to make the error of engaging in excessive speculation and insufficient research while deciding on their required workspace.
To evaluate the space that is suitable for your business, a broker will not only consider your specific needs but also assist in maximizing your financial investment. Brokers will analyze the market for commercial real estate to determine the desired property types and calculate the necessary space for future expansion.
Please rephrase the text below while maintaining the same meaning, thinking step by step. Do not add new information and do not remove information. Side notes: – When paraphrasing, focus on using different words and sentence structures to express the same ideas. – Make sure to understand the original text before attempting to rephrase it. – Each sentence should convey the same meaning as the original but in a different way. Original text: “When paraphrasing, it is important to use alternative vocabulary and sentence structures to articulate identical concepts. Prior to attempting a rephrase, it is essential to comprehend the initial text. The aim is for each sentence to convey the same meaning as the original, albeit in a different manner.” Rephrased text: 1. When paraphrasing, it’s crucial to employ different terms and sentence formations to express equivalent concepts. 2. Prior to embarking on a rephrasing task, it is necessary to fully understand the original text. 3. The objective is to ensure that each sentence conveys the same meaning as the original one, albeit in a distinct way.
When seeking a space for your business operations, it is beneficial to understand the factors that can enhance the value of your commercial real estate investment. This increased value can subsequently be utilized for reinvestment in your business, including areas like integrating new technology, employee training and development, or venturing into new markets.
