The purchase of commercial real estate is a major investment that should be made with care. Douglas E. Fleit and Brian L. Katz, CEO and President and COO respectively or American Real Estate Partners have the privilege of helping some of the most sophisticated investors in the world to invest in commercial real estate and can provide some pointers for success. Douglas E Fleit and Brian l katz have the simple philosophy, “Identify opportunity, manage risk, and create value.” Here, we’ll look at a few great tips that respect the wise words of Brian Katz and Douglas Fleit.
- Learn what the professionals know. For example, commercial real estate is valued differently than residential real estate as income on a commercial property is directly related to usable square footage. Commercial property also brings a bigger cash flow, because leases are longer and more space is used. Commercial property lenders also prefer larger down payments of at least 30%.
- Have a plan. Know how much you can afford to pay, how much you expect to make, who the key players are, how many tenants are already in, and how much space you need to fill.
- Know what a good deal looks like. Be looking for damage that requires repair, know how to assess risk, and be sure to do the math to decide if a property meets your financial goals. Most importantly, have an exit strategy. The best deals are the ones you know you can walk away from.
- Know key commercial real estate metrics. The biggies are net operating income (NOI), and cap rate. The NOI of a commercial real estate property is calculated by subtracting the first year’s operating expenses from the property’s first year gross operating income. It should be positive. A property’s cape rate is used to calculate the value of income producing properties.
- Find motivated sellers. The ones who are ready to sell below market value are the ones you want. Anyone with a pressing reason to do that is someone who you’ll be able to negotiate with, and that’s good.
- Discover neighborhood farming. Study the neighborhood of a commercial property by going to open houses, talking to other neighborhood owners, and looking for vacancies.
- Evaluate properties carefully. There are three major ways you should search for great deals: online, in classifieds, and through hired bird dogs. Commercial real estate bird dogs will help you find valuable leads for a referral fee.
Investing in commercial real estate is about so much more than farming neighborhoods, getting good prices, and drawing sellers. At its core, it’s about building relationships and rapport with property owners so that they feel comfortable talking to you about great deals. Be friendly, look carefully, and invest intelligently.