These are the things by the order I ask myself whenever I look at commercial real estate properties in Texas. Once you understand these key points, you should be able to quickly analyze a commercial property and give a quick offer. Since I never buy properties at retail price and always go for a discount, I do not waste time analyzing for hours if the owner has no motivation to sell below market value.
The first aspect of the commercial property I look at is the location of the property. If the land is worth something, then the property is worth at least the land! A good location is a city with population growth, job growth, and real estate development. Check zip code demographics from Citydata.com and other sources. If the property is in the middle of nowhere, don’t even waste your time. If the property is in the hood, don’t waste your time either.
If the population is growing and development is shown around the area with at least 40k and above income, the area is a B or higher location. My favorite is buying C-B properties that are cashing flowing in B-A locations with add value potential for higher cash flow to force appreciation.
Every asset type comes with his own risks. Please do your due diligence on the industry. I will be releasing industry analysis on each asset in the upcoming months. Google the industry and research each specific industry! Go to networking events that involve that industry and learn as much as possible. Depending on the industry even if it is thriving, the location may not be suitable due to competition or consumer demand. Do not just understand the industry as a whole but also specific to your location.
Capitalization Rate (CAP Rate)
Capitalization Rate is the ratio between the net operating income produced by an asset and the original capital cost. You must understand all the revenue coming in from the property and the expenses that come along. A table is below shown some of the common expenses. Subtract revenue by expenses to get your net income. Net income is what is most important. No point of making a $10,000,000 as revenue if your expense is $10,000,000! I have listed the common expenses below.
From net income, you can divide by the total purchase price for the cap rate of the property. By standard, I usually buy properties at 10 CAP with add value potential to reach 15-20+ CAP. Remember if the location is in the hood or in middle of nowhere, I would not even buy it, but if you plan to, then make sure CAP rate is high to take account for that.
Capital Expenditure is funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment. How old is the property and how long of life does it still have? You must take account of all the costs to upgrade and maintain the property.
How much you could possibly increase the revenue or decrease the expenses which are specific to asset class you are looking at. Just can you increase the revenue, doesn’t mean expenses do change too. Can you increase rents or put better tenants in the property? Putting better tenets who can pay higher will increase the net income in which increases the value of the property. Can you increase the profits of the business? You might have to add more labor cost and renovate the property to increase the revenue produced by the commercial property.
By reading this, I hope you will learn to analysis deals quickly and find great deals for yourself! You must take massive actions to find and analyze deals. The more you analyze and make offers, the faster you will learn!
Quickly analyzing the deal is different from due diligence. Just cause a seller tells you the revenue is X or expense is Y, you should automatically believe them without checking the number. But that is a whole story I’ll write about in the upcoming months!
Best Quality Investment