Commercial Property Analysis – The Biggest Mistake I See Investors Make

“Nourish the mind like you would your body. The mind cannot survive on junk food.” — Jim Rohn

Analyzing a commercial real estate deal is truly the beginning of where the rubber meets the road for an investor. Making a mistake during this stage of the game can lead an investor down a long and brutal road.

Ask many investors what is the most important thing in property analysis and you will get answers ranging from, “How much are the rents?” to “How much is it per square foot, or per unit?” These are good facts to begin your analysis with.

However, it is easy for investors become overly-focused on what I will call the “Income” items of a property. The biggest mistake I see investors make – especially just starting out – is not focusing attention on the “Expenses” of an apartment or commercial building.

Make sure when you are analyzing an apartment property that you factor in ENOUGH property expenses. We tend to be optimistic on expenses and tend to discount them based on what we know WE can do once we own the apartment or commercial property. Also, owners tend to discount the numbers, as well, in order to get their property sold.

What should you do?

Make sure you check every expense and check the last two years of tax returns on the property. Even then, check again. I once had a tax return tell me the property taxes on a property were $8,900 when in fact they were double this, $17,000!! The owner was reporting the $8,900 and so was the tax return!

Check, check, check. But….

Don't be toooo crazy. For example if the vacancy on a property is 7% and has been over a number of years do not factor in 37% “just in case.” This can be a fine line, but suffice to say make sure you avoid the BIGGEST MISTAKE when you buy – not checking the numbers.

A good example is if you are looking at an apartment property built before 1970, make sure that you understand your expenses are going to be AT LEAST 50% of your gross income. A property this age is not necessarily bad – but unless the current owners have gutted the property and replaced everything with brand new “stuff” your expenses will be AT LEAST this much.

I recently looked at a property built in 1967 and the owners reported their total expenses at 38% of the gross income. I am here to tell you there is no way this is accurate data… it is not going to happen. The reported expenses were wayyyy too low!

Do not get taken to the cleaners on this. Use the right math and lock in profits now. Always remember, older properties are always going to have more frequent repair and maintenance issues. This affects the net income, and that directly impacts the price you should pay, as well.