Looking for easy ways to analysing commercial real estate deal?
The first that most of us do is start with analysing the numbers. We want to grab the income expense statement and calculate the net cap rate and cash-on-cash return to qualify the deal. But before you do the maths you need to first analyse your return requirements.
We all invest in commercial real estate because we wish to create passive income, grow our net worth, and achieve financial independence. Before you begin you have to first analyse your situation because every ones situation is different. Analysing a deal will not be of much use if the deal does not fit your requirements.
For instance, if your aim is to grow your net worth and if you don’t know what you want your net worth to be, then you will never know if the deal is actually going to work for you or not. So the first thing you need to identify is what you want your net worth to be. Once you understand your specific need then it will be easier for you to find out if the deal works for you or not.
If you’re aim from your commercial real estate deal is to replace your earned income, then you need to know exactly how much cash flow you’re going to need coming in on a monthly basis from that investment in order so that you can leave your job.
Given below are four important steps for making the right decision:
Step 1: Understand the demand drivers for the property and its market location. Before you look at the numbers it is important to understand its location and demand for the property. If there is no demand for the space that you’re buying whether it is retail, office or industrial space then you are on a very slippery wicket. The theoretical return can be 12 or 15 percent but if there is low demand for the property you will have trouble in re-leasing the space. There is also unlikely to be any capital growth.
It is also important to take a look at the property itself. Does it have any environmental issues or what is the type of construction, how old is the building, what kind of maintenance it will need.Is the zoning favourable for future development? You must check fundamentals of the property before crunching the numbers.
Step 2: Evaluate the quality of the Tenant. Does the property provide a reliable and durable cash flow that can meetall out going expenses andservice the loan? This is of great importance. You don’t want to be saddled with a property that will take money out of your pocket to sustain it.It is possible to buy vacant commercial properties below market value but it offers challenges. You have to be sure about the location and demand drivers mentioned in Step 1 because if you cannot lease it at your projected rental or within reasonable time frame it can upset your calculations.
Step 3: Analyse the Outgoings. You have to study the expenses if they are realistic and in line with the market? Is there an opportunity for you to reduce or streamline expenses to increase your return on investment? There are properties that are poorly managed and outgoing expenses can be streamlined with little effort on your part. Once you reduce out goings and increase return you will be able to create instant equity.
Step 4: Qualify the Vendor. Always try and find out as to why is the vendor selling the property? If it’s such a great property then why is he parting with it? If you cannot identify reason for the sale or pain that is forcing the vendor to sell then you may not be getting a great deal. Try and buy from a motivated vendor if you want a great deal.