Want a hot commercial real estate deal? 5 rules you should follow

We all want to live our lives with some security and backup. No matter what kind of job you have, you can not be a successful entrepreneur without diversifying your earnings and investing them in order to generate more income. Investing is not a piece of cake. It takes hard work, time, and dedication to make your efforts in investing fruitful. You should be regular with reading up on stocks, checking out new and upcoming businesses, and most importantly, give commercial real estate a try. 

Investing in real estate is probably the smartest thing to do. Out of all the things you can invest in, this will be the only one offering tangible assets rather than intangible ones. Any real estate professional will tell you a number of benefits and advantages of investing in commercial rather than residential real estate. 

Commercial property investment can offer a consistent influx of cash, giving you not one but multiple income streams. This type of investment has an extremely high potential to yield good financial results since they are given higher rent than residential properties. Buying property also helps in increasing and building your equity. You can buy commercial property with a mortgage and a downpayment. Buying an asset without having to pay upfront can be quite an advantage. If this sounds interesting to you, we have curated a list of rules to follow while looking for a hot commercial real estate deal. 

Learn all the ins and outs

If you want to be a top-notch player in this field, it is important that you learn how to think like a professional. For example, laymen do not usually know that commercial property does not follow the same protocol as residential property in terms of valuation. They both have different criteria. While individual homes do not give out income on the basis of usable square footage, the commercial property does. 

You also need to understand the difference in the cash flow between these two types of properties. Do the math, you can earn much more with a multifamily dwelling than you can with a single home. Even the leases given out for commercial properties are longer than residential leases. This means that you will not be left without a tenant in a short period of time. It is important to do your research and understand what the professionals already know. 

How to recognize a good deal

If you’ve met a lot of real estate agents, you will know that most of them understand in a few seconds whether they are looking at a good deal or not. Understand a few rules so that you also know how to judge a property. Firstly, all good commercial properties will have an exit strategy. Be on the lookout for any damages the property might have sustained that will get its value down, assess the different risks of this property, and be sure to compare it to the best deal you have come across till now. 

Use a mortgage broker

If you do not have all the cash you need in order to invest in commercial real estate, do not worry, most commercial properties can be bought with a downpayment and a mortgage. There are many steps one needs to take in order to get a commercial mortgage. London, especially, has a ton of rules and regulations. You can easily hire a Commercial Mortgage broker in London if you feel lost. 

Commercial mortgage brokers help their clients in securing mortgages by using their advanced networks. They give you not one, but many different quotes and prices from various lenders. They can get you offers from banks, hard money lenders, balance sheet lenders, small credit unions, agencies, commercial mortgage-backed securities, and even through life companies. They help you in getting the lowest rate along with the best terms. 

Understand the various metrics used in commercial real estate

There are certain measures of quantitative assessment that are usually used for tracking production or performance, assessing, and comparing. There are a few metrics that one should know before getting into commercial properties:

Net operating income

Net operating income or NOI can be calculated for individual properties by evaluating the gross operating income of the first year and then subtracting the expenses for that year. It is important to have a positive NOI.

Cash on cash

Most investors dabbling in commercial real estate who are dependent on financing to buy property strictly follow the cash on cash rule. This is a formula used to compare and contrast the first-year performance of competing properties. You should understand that even though you do not have to pay the full price in cash for buying the property right now, it does not mean that you will keep all of the NOI. You will definitely use a lot of it to make your mortgage payments. In order to understand this, you must determine the exact amount required for the initial investment. 

Cap rate

A capitalization or “cap” rate is one that is used to calculate the value of different income-producing properties. This process will help you in understanding and estimating the net present value of cash flow or future profits. For example, properties that have apartment complexes with more than five units, small strip malls, and commercial office buildings can all be taken as good candidates in order to determine a cap rate. This process can also be called the capitalization of earnings.

Find motivated sellers

Just like any other business, the main part of real estate is also the customers. It is vital that you find people who are eager and willing to sell below the market value of their property. Nothing really happens in real estate till you actually find a motivated seller who is offering a good deal to you. They might just have their pressing and personal reasons for selling below the market value, so make sure to find motivated sellers.

Commercial real estate is a great option for diversifying your investments and looking out for your family during bad times. Follow these rules to understand how to get a hot commercial real estate deal. 

Jonathan Rice

Back to top