The Debate Over the Right Investment in Commercial Property

Whether you should release equity from your present home or will need to finance, commercial property could be a great answer. A thriving investment in commercial real estate is all about the ideal property, the ideal location and the right time. A Commercial Property investment should not be regarded as an emotional transaction unlike residential property.

The Debate Over the Right Investment in Commercial Property

By Rainer Stenzhorn of In2assets, the leading commercial property facilitation company in KwaZulu-Natal

Whether you should release equity from your present home or will need to finance, commercial property could be a great answer. A thriving investment in commercial real estate is all about the ideal property, the ideal location and the right time. A Commercial Property investment should not be regarded as an emotional transaction unlike residential property.

Finding a suitable asset through property investment is an excellent method to enhance your personal wealth but the key is to find the right investment.

When looking for commercial property the greatest value appreciation on commercial property counts on the form of developments that occur in the region, accessibility via road networks and the types of value addition the neighbourhood offers.

FIRST LEARN WHAT THE INSIDERS KNOW

To be a player in the commercial real estate sector, learn to think like a professional. For example, know that commercial property is valued differently than residential property. Income on commercial real estate is directly related to GLA or gross lettable area. That for example, is not the case with individual homes. The commercial property investor in general will also deal with a bigger cash flow due to the nature of the property. The critical point on commercial property is the lease, which is also longer in the residential sector. However, when it comes to finance, please keep in mind that in most cases the commercial property lenders require not only a 30% down payment, but would also vet lease agreements and locality of the property before they look at the deal.

WORK OUT YOUR PLAN OF ACTION

Setting your parameters is a top priority in a commercial real estate transaction. Make sure that you know how much can you afford to pay and what your return on investment will be. A proper due diligence not only on the property but also on the tenants is absolutely essential. 

LEARN TO KNOW THE GOOD DEAL

Commercial real estate professionals mostly identify a good deal when they see one. So what is their secret?  The first rule is to have an exit strategy – the best deals are the ones you know you can walk away from. It helps to have a sharp, landlords eye – always be looking for impairment that requires maintenances, know how to assess risk and make sure to take out the calculator to ensure that the property meets your financial goals.

GET FAMILIAR WITH KEY COMMERCIAL REAL ESTATE METRICS

The common key metrics to use for when assessing real estate include:

  • GLA (gross lettable area)

Gross lettable area (GLA) is the amount of floor space available to be rented in a commercial or industrial property. Specifically, gross leasable area is the total floor area designed for tenant occupancy and exclusive use, including any basements, mezzanines, or upper floors.

  • Net Operating Income (NOI)

The NOI of a commercial real estate property is calculated by valuating the property's first year gross operating income and then subtracting the operating expenses for the first year. You want to have a positive NOI.

  • Cap Rate

A real estate property's "cap" – or capitalization – rate, is used to calculate the value of income producing properties

A standard capitalization rate (colloquially referred to as a cap rate) is the expected net operating income for year 1, assuming the entire building is let at open-market rentals, divided by the purchase price. This calculation ignores VAT, transfer duty and income tax, and assumes a cash transaction.

  • Cash on Cash

Commercial real estate investors who rely on financing to purchase their properties often adhere to the cash-on-cash formula to compare first-year performance of competing properties. Cash-on-cash takes the fact that the investor in question doesn't require 100% cash to buy the property into account, but also accounts for the fact that the investor will not keep all of the NOI because he or she must use some of it to service bond payments. To uncover cash on cash, real estate investors must determine the amount required to invest to purchase the property, or their initial investment.

  • Look for Motivated Sellers

Like any business, clients drive real estate and if you want the right property, your job is to find them - specifically those who are ready and eager to sell below market value. The fact is that nothing happens - or even matters - in real estate until you find a deal, which is usually accompanied by a motivated seller. This is someone with a pressing reason to sell below market value. If your seller isn't motivated, he or she won't be as willing to negotiate.

  • Use the Fine Art of Property screening 

A great way to evaluate a commercial property is to study the precinct the property is located in by going to show houses, talking to other commercial property owners and brokers, and looking for vacancies and evaluate why the premises are vacant. Use the internet as it gives you most of the time the true reflection of property activities within a specific area.

IN CONCLUSION

Searching, finding and evaluating commercial properties is not just about farming commercial areas or the internet, getting a great price, or sending out smoke signals to bring sellers to you. At the heart of taking action is basic human communication. It's about building relationships and rapport with property owners so they feel comfortable talking about the good deals - and doing business with you.

 

Posted by In2Assets