7 Steps to a Hot Commercial Real Estate Deal

7 Steps to a Hot Commercial Real Estate Deal

Commercial real estate has become an attractive asset class for investors because of the massive payoff, economies of scale, and lesser competition. You can easily spot the hottest commercial property deals by using this 7-point blueprint.

1. Learn about the business

As an investor, you should know the difference between commercial real estate and residential real estate. Commercial property earns income from its usable square footage. Residential property gains are exclusively derived from rent. Obviously if you have a multiple-family dwelling with a longer lease, you’ll have a bigger cash flow than from a single-family home on a shorter lease. One tip on credit: lenders typically ask at least 30 percent down payment before they give a commercial property loan the go-ahead.

2. Create a mortgage plan

Before you go hunting for commercial property deals, make sure that you’ve got a mortgage plan already laid out. Decide how much you are willing to pay for the home and how much income you expect to make. Once you’ve found a prospective deal, check out the property if it has existing tenants, how much rent they are paying, and how many more vacancies you need to fill. Utilize finance tools such as mortgage calculators to see how much you have to spend over the life of the mortgage.

3. Know how to assess risks

Savvy real estate pros know how to assess potential risks on a commercial property. Look for evidence of mold, mildew, and water damage. Are there cracks on bricks and concrete? If you need to make repairs, calculate the cost and determine if it is within the overall price of what you are willing to spend.

4. Find motivated sellers

Look for commercial property owners who are eager to sell. If they have a strong motivation to get the property out of their hands, they are more likely to sell below market value. One good source to start with is a county list of tax delinquents. This list can be a gold mine for highly motivated sellers in one locality. You could also search for commercial real estate owners who have moved out of state or have owned the property for 10 years or longer.

5. Scout the neighborhood

Another way to spot hot property deals is by going around the district. Search for vacancies. Talk to the locals. Drop by open houses.

6. Maximize multimedia resources

Apart from traditional media such as classified ads, public records and the Internet, you might want to hire a bird dog. In real estate investing, the term bird dog refers to someone whose primary job is to locate properties with substantial return potential. A bird dog would typically look for distressed buildings that are selling at a discount or undervalued properties that would make good rentals. Real estate bird dogs can help you find profitable investment leads for a minimal fee

7. Understand commercial real estate metrics

If you plan on investing in commercial real estate, you must learn not only the ins and outs of the business but the jargon too. Some key metrics and formulas that you have to understand include Net Operating Income (NOI), cap rate, and cash on cash.

These seven tips are just strategies on how to find lucrative commercial property investments. Like any transaction, human interaction is still the most important part of closing a deal. While you perform due diligence, farm neighborhoods, and send out bird dogs to hunt for motivated sellers, take the time to build great rapport with commercial real estate owners so they feel at ease when both parties reach the negotiating table.

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