Steps to A Positive Commericial Real Estate Deal

Thursday - November 21, 2013

Find out What the Insiders Understand
To be a player in commercial real estate, learn to think like being a professional. For example, know that commercial property is appreciated differently than a residential home. Income on commercial real estate is directly related to it’s usable square footage. That’s not the case with individual homes. We also see a bigger profit and quantifiable ROI with commercial property. The math is easy: you’ll earn higher profit on multifamily dwellings than you would on a single-family home. Know also that business oriented property leases are longer extended than single-family households, which is the foundation for greater cash flow.

Mapping Out a Strategy
Setting parameters is key in a commercial real estate deal. How much can you afford to pay? How much do you expect to generate on the deal? Who are the key players? The number of tenants are already agreeable and paying rent? How much rental space are you looking to fill?

Get Familiar With Key Commercial Real Estate Property Metrics
The common key metrics to utilize for when assessing real estate include:

  • Net Operating Income (NOI)
    The NOI of a commercial real-estate property is calculated by valuating this property’s first year gross operating income and subtracting the operating expenses with the first year. You want positive NOI.
  • Cap Rate
    A real estate property’s “cap” – as well as capitalization – rate, is used to calculate the benefit of income producing components. For example, an apartment complex of five units or higher, commercial office buildings, and smaller strip malls are extremely good candidates for the cap rate determination. Cap rates are utilized to estimate the online present value of future profits or profit; the process is also called capitalization of earnings.
  • Cash on Cash
    Commercial real estate investors who rely on financing to acquire their properties often stick to the cash-on-cash formula for you to compare first-year performance associated with competing properties. Cash-on-cash takes the belief that the investor in dilemma doesn’t require 100% cash to buy the property into consideration, but also accounts for the belief that the investor will not keep each of the NOI because they must use some of it to make mortgage repayments. To uncover cash-on-cash, real estate investors must determine the quantity required to invest to acquire the property, or the initial investment.
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