How do real estate developers find the best commercial deals? Commercial properties are typically known to generate more cash flow than residential properties, so it only makes sense that real estate developers ears perk up when they hear about a new opportunity for a commercial real estate deal. Below are 7 tricks to understanding a good commercial real estate deal.
1) Understand the Basics – To be a part of commercial real estate, you have to understand how the game is played. How are properties valued different than in residential real estate? There is a direct relationship between income and usable square footage in a commercial deal. The lease date on a commercial deal is typically longer than on a residential deal. Lenders of commercial property typically want a 30% down payment before they agree to the loan conditions.
2) Create a Strategy – There are vital questions when preparing to rent a commercial space. What is your maximum budget? How much money are you trying to make from this deal? Who is involved with the transaction and who is responsible for paying rent? How much space are you looking for?
3) Study the Market – Always learn how to find a good deal before entering the market. It is always critical to have an exit strategy. Look for issues with the property that need to be fixed, and learn how to assess risk. Understand your finances so that you can make sure the property fits within your budget and annual plan.
4) Learn Commercial Real Estate Terms – Cap Rate: used to calculate the total value of income producing properties, net present value of future profits (cash flow), and capitalization of earnings. Net Operating Income (NOI): The commercial property’s first year GOI (gross operating income) – first year operating expenses = NOI
5) Find the Right Seller – It is critical to find a seller that seems eager to sell his property below market value. This seller will typically have a pressing reason or time constraint to sell the property.
6) Study the Neighborhood – Take a second to study the neighborhood. Get to know the people around the area and attend open houses.
7) Use the “Three-Pronged” Approach – 1) Look online 2) Read the classified advertisements 3) Hire a bird dog. These three methods are a great way to find investment leads that are worth your time.