Commercial Real Estate Investment Success Begins With a Positive Mindset
Posted on 24. Jan, 2010 by admin in general
Ever thought about real estate investing as a means to supplement an income, or even as an avenue to entrepreneurship? The current foreclosure epidemic has caused people who have never considered real estate investing to give it a thought. With foreclosed properties selling at all time lows many wonder about the potential to “cash in.”
The recent foreclosure boom has caused many homeowners to need housing. Commercial real estate can be very lucrative at a time like this. Potential homebuyers are hesitant about purchasing because of economic uncertainties, making the need for rental properties and apartments in high demand.
Many people wonder if they have what it takes to be successful in real estate. The saying real estate investing “isn’t for everyone,” isn’t necessarily true. Real estate investing begins with a proper mindset. Educated investors make the best investors. Understanding the strategies behind real estate investing is the first start to developing the right mindset.
Real estate investors should seek courses and information which educate, motivate and instigate dynamic change in their lives. It is important to free one’s self from the negative talk and dire predictions of the world and embrace new ideas, money-making methods, investment strategies and to network with like-minded/ upwardly mobile individuals and experts in the real estate investment and financial education field, when deciding to pursue real estate investments.
The power to be successful begins with having a successful mindset and learning to welcome success. Building financial wealth through commercial real estate investments is very possible with the proper training and a positive mindset. It is not recommended that anyone jump into real estate investing without the correct instruction. Commercial real estate investing with the proper training can not only lead to financial security but also to peace of mind.
About The Power to Be Free
The Power to Be Free is a group of successful real estate investors committed to building more financial success through the power of collaboration and networking. In addition to that they are equally committed to empowering and teaching others to build financial wealth and to successfully invest in real estate as well. All The Power to Be Free members have either achieved financial success and are poised to increase their financial rewards or they are new members who are serious about learning how to do what it takes to increase their personal and professional success while also learning to empower and motivate those who will follow them. The Power to Be Free is about exactly what the name suggests; empowering people and communities to gain freedom through financial
success and real estate investing. The Power to Be Free is building a veritable army of leading experts in the field of commercial real estate investment and wealth building. More information is available online (http://www.ThePowertoBeFree.com)
Buying Commercial Real Estate – Case Responsible
Posted on 23. Jan, 2010 by admin in general
Currently, the market has a large number of proposals for the sale of industrial bases, offices, warehouses, buildings, non-residential premises and so on. Commercial real estate may be subject to any prescribed or at least not prohibited by law transactions.
Given the great economic significance of the property objects is clear the importance of compliance with certain procedures in the sale of commercial real estate lease. Property subject to economic and legal risks that must be carefully evaluated.
The first buyer, to compile a list of documents required for the provision and a list of questions requiring answers. A seller of real property necessary to seek not only legally but also the technical documentation to the facility.
Always important legal history of the facility, which can be quite complicated and fraught with potential conflict situations, out of which could mean additional costs to the buyer. In practice not uncommon situation where the innocent purchaser of property is mired in a protracted and costly conflict, bought it inherited from the not too honest seller. In particular, it deals with administrative issues or possible conflicts with the owners or tenants of neighboring objects. The legal status of neighboring target sites and buildings can also significantly affect the ability of its use.
After studying the legal documentation and receipt from the seller’s answers to questions regarding the legal history of real estate, should move to the dissemination of technical documentation.
Depending on the object and its destination, the legal and technical information that will need to be explored will be different.
Professional analysis of documents could eliminate or significantly reduce the risks of them.
The next step is to compile, negotiated and concluded a contract of sale of real estate.
In the sales contract must be specifically identified parties to the transaction and the essential conditions set by law for the sale of real estate.
In the preamble of the treaty should be to identify the parties to the contract.
The contract specifies the location of the property: name, address, location of the facility, the appointment; area, floors and other necessary parameters to define clearly the subject of the contract.
Another important provision of civil law is an indication that the contract of sale of real estate should include the price of the property.
In the absence of a treaty agreed by the parties in writing the terms of the contract price of real estate on its sale is considered nezaklyuchennym, as indicated by paragraph 1 of article 555 Civil Code.
The price of real estate is strictly a specific individual and may not be comparable to similar types of real estate, with signing a contract of sale of such property can not apply paragraph 3 of Article 424 Civil Code, allowing prices in the absence of a reimbursable contract to apply price which, in comparable circumstances is usually charged for similar goods.
You may also want to record in detail in the contract payments and transfer of immovable property.
Contract sale of real estate is concluded since it was signed by the parties.
The conclusion of a contract for the sale of real estate and entry into force making it compulsory for the seller and buyer, but not for third parties. It is the time of the contract and to the state registration, the buyer has the right to require the seller to his execution, that is transfer it to sell the property.
The final step in the purchase of commercial real estate agent is the Registration of transfer of property to the buyer.
Commercial Real Estate Myths Dispelled: Myth #1: Commercial Real Estate Is Not For Ordinary People
Posted on 22. Jan, 2010 by admin in general
People are naturally inclined not to trust what they don’t understand. The same is applicable to commercial real estate investing. It’s a natural phenomena when confronted with something new, different or seemingly over your head.
But when it comes to commercial real estate investing, that belief can cost you a small or large fortune.
For instance, when I first got started in real estate, one of the biggest challenges I had to get past was the idea that commercial real estate was too complex for me. That it was for the “big boys”.
Even residential real estate agents suffer from this same mindset. They too believe that in order to break into commercial real estate they have to be promoted.
Nothing could be further from the truth.
For those with a determined mind to get involved in commercial real estate, the challenges are easily overcomeable.
But like all, myths the idea that commercial real estate investing is too complicated for mere mortals is grounded in a bit of fact. Commercial real estate does seem complex.
So let’s dispel this myth right now.
Would you file your own lawsuit?
How about fly your own jet?
What about do your surgery?
Or how about even filing your own tax return.
Would you do surgery on yourself?
I think you’ll agree these things are complex if you tried to do them on your own. But ordinary people get them done everyday.
So what’s the truth?
The truth is that the most successful investors, whether novice or experienced, use professionals and experts when some “heavy lifting” is required. The details of tax, law and finance are better off left to them.
If there’s one area where you should spend you time and become an expert in is the market where you have your real estate. This is one area where you should spend your time.
Knowing your market, knowing the mindset and behavior patterns of your prospects will pay handsome rewards for your long term.
Leave the complex topics to the people who know how to deal with the complicated stuff. That’s the best strategy for success for the up and coming commercial real estate investor.
So as you can see, there’s no reason to be intimidated by commercial real estate. The benefits and advantages of investing in commercial real estate far outweigh the disadvantages or unforeseen complications you may occasionally come across. And even then, there are experts who can support you in your efforts. They are rather inexpensive when you look at it in this light.
The only time they get expensive is when you try to do it on your own and then unintentionally make a mess.
Put these professionals on retainer and use them. That’s what they are there for.
Lucrative Incomes For Commercial Real Estate
Posted on 21. Jan, 2010 by admin in general
It is considered, in fact it is perfectly true as well, that the real estate is the safest investment opportunity. You have to do the investments with proper evaluation and also have to be on look out for great deals. If you put great efforts and do your homework properly, you will be assured of getting great profits.
Mostly when people talk about real estate field, the implicit assumption is the residential properties. In fact commercial real estate is also a good avenue to make lucrative returns. The demand for commercial real estate actually is very high and is on the rise as well.
Commercial real estate market deals with variety of properties suitable for different purposes. It is not simply office complexes or buildings for industries or factories. There are many more kinds of commercial real estate, like health care centers, warehouses, super malls and retail structures. As per building rules any property with more than four dwelling units are considered as commercial properties.
Is the commercial real estate really provides lucrative income?
Many novices in the real estate field asked me very often the same question. I always advice my friends to go with commercial real estate business, it is because of the experiences I gained in this field.
When you are in the field, you will understand the advantages of commercial real estate. One issue I found with this field is the difficulty in locating the perfect opportunity. It is a little difficult process than identifying a good residential property. But keep in mind that the return from commercial real estate will be very big, bigger in multiples what you get from residential real estate investments.
People invest in commercial real estate either for selling after a short period with a higher price or to rent it out to retailers. An important growth signal of residential real estate in any locality is the development in the commercial real estate. If you come to know that there is a chance of significant commercial development due to any reasons like tax break, you should analyze the potential of the market immediately and act fast.
You should always be in watch out for great deals. Generally large properties come with cheap real estate prices. You may not afford to purchase such big chunk of property. But You can make a good investor group including your friends and family members, so that you can get hold of the property as a whole in cheap or moderate prices. I have done it; I am a member of a small investor group.
If you expect a retail boom in a locality, you can make profit by purchasing a good property and by converting it to a warehouse. It can be rented to the retailers who are thriving to start retail businesses during that boom period.
During my search for great deals in commercial real estate business, I came across plenty of opportunities, which are more attractive and profitable. Prosperous growth of any business depends on the right decisions at right time. A host of excellent opportunities are awaiting you, it just matters only when you grab the great opportunities.
Can Commercial Real Estate Be Risky?
Posted on 19. Jan, 2010 by admin in general
Real estate investors often hear stories of how profitable commercial real estate can be.
These success stories paint the picture that investing in commercial real estate is a goldmine just waiting to be discovered. In some ways, investing in commercial real estate can be considered as just that.
Many people are not aware of the profits that can be made through investing in commercial real estate. Similarly, they are also unaware of the amount of work that is involved with commercial real estate investing.
Certainly those people who have been successful in investing in commercial real estate are not trying to lead sheep to slaughter by making it seem that the process is all glitter. Rather, these people have worked in the area so long they know how to work around the possible pitfalls involved with investing in commercial real estate.
If you are thinking about getting involved with commercial real estate investing you might wonder if everything is as easy as it may first seem. There is no simple answer to this question. Rather, it is good to know the bad side in addition to the good side so that you can make an informed decision about investing in commercial real estate.
As you may have already discovered, commercial real estate is very much different from residential real estate. With commercial real estate, there are many subcategories in which you can choose to become involved.
When some people first begin investing in commercial real estate they make one of two mistakes. Either they begin working in an area of the market that they are unfamiliar with or they try to work with too many parts of the market. Since there is more than one category of commercial real estate, it is best to pick one of those categories to specialize in.
This way you spend your time getting better at just one aspect of commercial real estate rather than becoming the “jack of all” trades in the market.
Another thing that could be considered a disadvantage to investing in commercial real estate is that you must be very detailed oriented. One of the biggest mistakes that investors make in this market is contract oversight.
There are many different negotiable terms in a commercial real estate contract. If you fail to close the loop on any of these terms you could find yourself in a situation where the person on the other end of the deal has the upper hand. You want to avoid this situation at all costs.
Having an attorney read over your contracts is a good practice to make sure the contract is in your best interest.
When investing in commercial real estate, exit strategies are a must. Because of the nature of commercial real estate, there is a greater chance that something could go wrong.
For example, a buyer could back out of the deal at the last minute. It happens frequently in the commercial real estate business. Always have a contingency plan in the event that things do not go according to plan. The last thing you want is a commercial property that you can’t sell.
Indeed, there are some advantages to investing in commercial real estate. However, disadvantages exist as well. It is best to know both sides of the story so that you don’t find out when it’s too late.
For Agents And Brokers: Simple Guide To Selling Your Commercial Real Estate
Posted on 19. Jan, 2010 by admin in general
If you are just starting out as a real estate agent, it can be difficult to get started selling commercial real estate. However, commercial real estate is the big money maker in the real estate business. Since commercial real estate has become quite popular since it is such a money maker, it can be difficult and expensive to get started in this type of real estate. There are, however, a variety of ways that you can get started and start getting more commercial real estate deals if you are willing to do a little work.
Online Free Ads
One great way that you can get started in selling commercial real estate as an agent is to use inexpensive methods of advertisement. One great way to get the word out there about the property you are trying to sell is to use free online ads. There are a variety of different websites that are available for you to post classified ads on that list a property, or even multiple properties for sale, and the great thing is, you will not have to pay a penny. Not only is this a cheap way of exposure, but it is also a quick way to get your property noticed. Many times, your ad will be seen quicker when you put it on the web and by many more people. Local newspapers take more time and money to get you the exposure and only reach a local group of people, while advertising with free online ads can get your world wide exposure and help you sell the commercial property.
Free Real Estate Publications
Another way that newer real estate agents can get their commercial properties noticed is to advertise them in free local real estate publications. Whether it is a publication specifically for real estate or a publication that only includes real estate, this is a great way to advertise your property for free. This is an excellent way to gain local exposure, not only for the commercial property you are trying to sell, but also for you as an agent. Make sure that you continue to run ads for your property in these types of publications. Even though at first you may not see results, remember that many times it takes awhile for commercial real estate to sell, but perseverance can lead to a large pay off when you finally sell the property.
Quality Signs
If you are trying to sell a commercial property, especially one that is near a well traveled road, you may want to invest in a quality sign to advertise the commercial property. A small unprofessional sign may not attract any attention at all, but a larger sign that is well crafted and attractive can get the attention of many people who are driving by. You never know who may drive by the property and see your sign. While it will take a bit of money to get a great sign, it will be worth the money that you spend to get your property noticed. One never knows when a local business will need a new site, or someone with money to invest will be looking for an opportunity, and your sign will make sure that they will see your property when they drive by, which may lead to a sale.
Establish Business Connections
As a new real estate agent, one of the best things that you can do is to start establishing business connections with a variety of different people. Speak with other real estate agents that are successful in selling commercial real estate and learn from their mistakes and their successes. Also try to get involved with local business people and know the market that you are trying to sell in. Often, if you can get the word out that you have a great piece of commercial property, it may spread to the right business people that will want to check it out. A great deal of being successful in the commercial real estate market has to do with the connections that you have, so work on making various business connections.
Find Your Own Leads
Even if you are working in a broker’s office, you should not expect the leads to be coming your way within the office. More than likely any leads within the office will be given to someone with more experience in commercial real estate until you have proven yourself to excel in this field. You will have to take the initiative to get the job done, and it is possible with a great deal of hard work. Check out the Chamber of Commerce in your area and find out who the business people are. You may also want to attend local zoning meetings where you will meet prospective investors who are looking for great properties. Even hitting up your local golf courses can help you make friends with local business people who may be prospective clients.
While it may be difficult to get started as an agent in commercial real estate, it is definitely possible if you are willing to work hard. Using the internet to advertise as well as free local publications can get the word out quickly and inexpensively so you will save money and get a broader base of exposure for what you are selling. Signs will also provide great exposure and show that you are serious about the commercial real estate business. Also important is making the right contacts and finding your own leads so you can excel in this business and prove to be a great commercial real estate agent. There is a great deal of money to be made in the commercial real estate industry, and hard work, dedication, and patience on your part can help you become successful.
Big Profits in Commercial Real Estate
Posted on 17. Jan, 2010 by admin in general
Real estate is often known as the safest investment available. Because,real estate investing executed with correct evaluation of the property (and its true value), can result in good earnings. This is one reason how come a few people engage in real estate investing as their regular job. The dialogue of real property are broadly centered toward residential real estate; commercial real estate seems to be not as popular. All the same, commercial real estate also is a good alternative for investing in property.
Commercial real estate includes many various forms of properties. Most folks associate commercial realty with only office buildings, parks or manufacturers/ industrialized units. Even so, that’s not entirely all of commercial real estate. There’s more to commercial real estate. Health care centers, retail structures and storage warehouse are all good examples of commercial real estate. Even residential properties like apartments (or any property that comprises of more than 4 residential dwelling units) are considered commercial real estate. As a matter of fact, such commercial real estate is much sought after.
So, is commercial real estate really profitable? Well, if it were not Lucrative I wouldn’t of have been writing about commercial real estate at all. So, commercial real estate is productive for sure. The only matter with commercial real property is that acknowledging the opportunity is a little difficult as equated to residential real estate. But commercial real property profits can be real huge (in fact, much bigger than you would anticipate by residential real estate of the same proportion). You could take up commercial real estate for either reselling after appreciation or for letting out to, say retailers.
The commercial real estate development is as a matter of fact handled as the 1st sign for emergence of residential real estate. Once you acknowledge of the possibility of significant commercial growth in the area (either due to tax breaks or whatever), you had better begin assessing the potential for appreciation in the prices of commercial real estate and then go for it promptly (equally soon as you find a good deal). And you must really work towards getting a good deal.
If you find that commercial real estate, e.g. land, is available in large chunks which are too costly for you to purchase, you could look at forming a small investor group (with your friends) and purchase it collectively (and split the profits later). In some cases e.g. when a retail boom is expected in a region, you may determine it profitable to purchase a property that you can change into a warehouse for the intent of renting to small businesses.
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The Importance Of Commercial Real Estate Professionals
Posted on 16. Jan, 2010 by admin in general
Commercial real estate is a highly profitable industry where many people dedicate their lives. Like the many divisions of a Fortune 500 company, the commercial real estate industry has many opportunities for those with professional educations and interests. Some professional interests may include legal counsel, accounting, finance, development, building and investing. When it comes to the commercial real estate industry, these professionals are highly specialized in their knowledge and perform amazingly well within their boundaries.
These highly specialized professionals are often grouped together in teams by commercial real estate investors. A savvy investor surrounds him or herself with competent professionals to make sure that every deal that is made yields the highest most profitable results, with little to no problematic factors.
If you look at the residential investor, however, he or she usually does not have a huge team surrounding him or her and can usually invest in a few homes at a time with ease.
Why is it that the residential investor does not need a full time team to look watch over and consult every deal prior to purchase? Beyond the obvious reason that residential real estate does not involve nearly the millions, tens of millions, hundreds of millions and even billions of dollar price tags and profits that commercial real estate is known for, there is another very important attribute of commercial real estate that separates it from residential real estate.
This attribute is characterized by a term known as “buyer beware.”
We all know that with most residential real estate, the buyer must be disclosed of every aspect of the property- good or bad. For example, if the roof was leaking in a home, but it was summer so the purchaser may not necessarily find out until rainy season, then the owner or agent must disclose this fact to the purchaser. It is illegal for the owner or agent to withhold any information from the purchaser. This law greatly decreases the risk on the purchaser’s behalf and if a problem arises that was not fully disclosed at the time of purchase, then the purchaser could receive his or her deposit back and the owner and agent could suffer penalties.
In residential real estate, the buyer does not need to beware (in this sense) because every detail must be disclosed so he or she has the absolute facts on a property before deciding to part with a down payment or take out a mortgage to purchase the property.
The opposite is true in the commercial real estate industry. The owner or agent does not need to disclose any information about the property to the purchaser. In fact, if the new owner discovers that the land he or she purchased is toxic, and the previous owner or agent said nothing, it is the new owner’s responsibility to have the land cleaned. The new owner must pay all legal and cleaning bills that come along with toxic property.
This may seem rather unfair. Why should the residential real estate industry have full disclosures while the commercial real estate industry does not? In commercial real estate, you have a certain amount of time prior to purchase to perform due diligence, or a complete analysis of the property. This may include building inspections, soil tests, infrastructure analysis, financial analysis etc. The buyer is completely responsible for retrieving the facts on a property.
It is considered an open and free market so, “buyer beware.” There is a lack of need to protect the buyer or seller by the law. Therefore, it is increasingly important to have commercial real estate professionals looking out for the commercial real estate investor at every turn.
Because the law does not protect the buyer, the buyer must protect his or herself. Legal counsel should be brought in to oversee every single deal. This includes conditional statements on a contract and performing the most in-depth due diligence one can possibly do. Commercial real estate is not something you can look at for a few weeks and then decide you want to purchase like a home. It can take 45, 60, 90 days and more to perform due diligence, depending on the purpose of the property and how complicated the property is.
Let’s look at an example. Purchaser A wants to purchase a property from Seller B. The property is raw land and is currently zoned R-1, or residential lots one lot per acre. According to the agent, there is a good possibility that the city needs additional commercial land to balance out the additional homes and apartments that were recently built near the subject property. For this reason, the city may be interested in rezoning the land from R-1 to commercial.
Purchaser A can see the profit potential of this rezone and wants to purchase the property. Purchaser A lets the owner know that he wants to purchase the currently zoned R-1 property. Purchaser A is acting in good faith that the property will be rezoned to commercial. But just in case, Purchaser A includes a conditional clause that states that if the property cannot be rezoned to commercial, then the contract is null and void. Purchaser A will no longer have a liability toward the property and owner.
This was an intelligent move Purchaser A made because in this case, the property could not be rezoned to commercial. Instead of sitting there with a much less valuable R-1 zoned property, Purchaser A was left with no property at all, but no financial or legal problems either. And that is far better than a worthless property and a legal battle to contend with.
Every commercial real estate deal is extremely different. Buyer and seller personalities, the quality of due diligence, the integrity of the buyer and purchaser, the financial needs, and skills of professionals such as the escrow company and commercial real estate owners all play a huge role in how each deal results. The best and most sound advice I can give you is never take what you hear for face value. Verify every fact and have your commercial real estate professionals available at every turn. The information they can conjure can save you a lot of money and legal headaches by simply getting the facts verified and inserting conditional clauses in the contract.
If you are new to the commercial real estate industry, realize the rules are a little different and a lot more is at risk than in the residential real estate industry. Keep the “buyer beware” mentality alive at all times and allow professionals to do their jobs. That is what they are there for. Surround yourself with the best and you will quickly become the best.
Now that you have had a chance to look at “buyer beware” and how it plays a specific role in both the commercial and residential real estate industries, you can greatly appreciate the additional risk in doing commercial real estate deals as well as the importance of solid commercial real estate professionals working in your best interest. Without them, there would be far more problematic deals- and that is exactly what you want to avoid.
Commercial Real Estate Syndication: Property Selection and Purchase, Part 2
Posted on 15. Jan, 2010 by admin in general
We’ve been discussing the process of assembling groups of investors for the purpose of acquiring income producing commercial real estate. The first part of this article can be found at www.InvesmentPropertyInsider.com/?p=97. We’ll assume for the purposes of this article that you’ve selected your target investment property. Now you need to get it into escrow, but with a purchase structure that favors your group investment strategy.
The ideal time period for a group investment purchase is 120 days. This time period breaks down as follows:
Days 1 to 30: Focus on completing your Due Diligence (investigation) on the property, clearing contingencies, and verifying everything stated by the seller.
Day 31 to 45: Here is where you create the Investment Circular and form the LLC that will own the property, by filing the Articles of Organization and the Operating Agreement.
Days 46 to 90: Now you can solicit interest from potential investors. Your goal will be to get completed subscription agreements and monetary contributions from the new members of the LLC by the end of this period.
Days 91 to 120: This is basically a contingency period for you in the event the subscription process takes longer than expected.
As a matter of strategy, you should consider the 90th day as the “make or break” of your group investment. It is very likely that you won’t be able to keep the escrow open longer than 90 days without putting your deposit at risk (called “going hard”). So, if it looks like you can’t fully fund your LLC by the 90th day, it’s probably best to unwind the escrow and get your deposit back … sooner, if possible.
In fact, you’ll probably have quite a bit of pressure to release your deposit sooner than 90 days. What to do? Well, as you continue with your group investment program, you’ll want to line up your investors sooner than indicated above. Realistically, you’ll want to give your “A-list” of investor candidates notice as soon as you take a property to escrow.
Speaking of escrow, when you open it, you want to write the purchase contract with you, the syndicator, as the borrower. This is for tax reasons. By doing so, you establish your ownership of the property rights. It is by assigning these rights to the LLC before you close that you establish your ownership percentage (whatever you negotiate with your investors) in the property.
To be perfectly safe, you should consider opening two escrows. The first one is for the purchase of the property, as described above. The second is set up to fund the LLC. Its sole purpose is to hold the funds from the members as they subscribe into the group investment. Once it’s fully subscribed and the purchase escrow is ready to close, funds are transferred from the “funding” escrow to the purchase escrow. The reason to have the second escrow is to protect the investors’ funds in the event there are complications with the purchase escrow. The seller’s permission would not be required to release the investors’ funds back to them with this structure.
Another option is the “receipt of third party deposit.” In this process, investors fund their contributions directly to the purchase escrow, but they do so under certain conditions which allow the escrow officer to return the funds in the event the purchase doesn’t close. The LLC (after assignment by the syndicator) and the seller are the parties to the transaction. The investors are third parties whose funds are disbursed according to separate instructions. Check with your escrow provider to see if they will allow third party receipts before opening escrow.
In my next article on this subject, I’ll cover the strategies you need to consider to control a property for a sufficiently long period of time to allow you to actually fund as a group investment.
How to Value Commercial Real Estate
Posted on 14. Jan, 2010 by admin in general
One of the first questions you’ll ask yourself when you are looking at a new property to purchase is: What is this property worth? That is a different question then: How much can I pay? And it’s still different then: What can I get this property for? But all of those questions need answers before you put in an offer to purchase a new property.
How an investor chooses to value a property can depend on the size of the property or the sophistication of the purchaser. We rely on the simple methods, both because we are new to commercial investing, and because we’re looking at small properties. But, simple doesn’t mean less reliable or less accurate when it comes to commercial valuation.
Essentially, there are three ways to value a commercial property:
1. Direct Comparison Approach
2. Cost Approach
3. Income Approach (which includes the DCF method and the Capitalization Method).
The direct comparison approach uses the recent sale details of similar properties (similar in size, location and if possible, tenants) as comparables. This method is quite common, and is often used in combination with the Income Approach.
The cost approach, also called the replacement cost approach, is not as common. And it’s just what it sounds like, determining a value for what it would cost to replace the property.
The third, and most common way of valuing commercial real estate is using the income approach. There are two commonly used income approaches to value a property. The simpler way is the capitalization rate method. Capitalization Rate, more commonly called the “Cap Rate”, is a ratio, usually expressed in a percent, that is calculated by dividing the Net Operating Income into the Price of the Property. The cap rate method of valuing a property is where you determine what is a reasonable cap rate for the subject property (by looking at other property sales), then dividing that rate into the NOI for the property (NOI is The Net Operating Income. It’s equal to income minus vacancy minus operating expenses). Or, you could figure out the asking cap rate of the property by dividing the NOI by the asking price.
For example, if a property has leases in place that will bring in, after expenses (but not including financing) an NOI of $10,000 in the next year and comparable properties sell for cap rates of 6% then you can expect your property to be worth approximately $166,666 ($10,000/.06 = $166,666). Or, said another way, if the asking price of a property is $169,000, and it’s NOI is estimated at $10,000 for the next year, the asking cap rate is approximately 6%.
Where this gets tricky is when properties are vacant, or where the leases are set to expire in the upcoming year. This is often when you are forced to make some assumptions. (We’ll save how you deal with this for another day.)
The other income method is the DCF method, or the Discounted Cash Flow method. The DCF method is often used in valuing large properties like downtown office buildings or property portfolios. It’s not simple, and it’s a bit subjective. Multiple year cash flow projections, assumptions about lease rates and property improvements and expense projections are used to calculate what the property is worth today. Basically, you figure out all of the cash that will be paid out and all of the cash that will be brought in on a monthly basis over a specific period of time (usually the time you plan to hold the building for). Then you determine what those future cashflows are worth today. There are computer programs like Argus Software that help in these types of valuations because there are many variables and many calculations involved.
For the small investors, like us, using a combination of comparable property sales and income valuation using cap rates, will provide a reliable valuation. The real issue is convincing the seller that they should sell based on today’s income and today’s comparable properties. In the case of a mixed use commercial building we just tried to buy, the seller was pricing their property based on assumptions that leases will renew in the next 6 months at substantially higher rates and that the area of the property will continue to improve making the property more desirable. Unfortunately, we don’t buy properties hoping for appreciation. We buy properties today because the property will put more money in our pocket each month then it takes out, and the property fits within our investing goals.