Ever wonder about commercial properties and how to invest with them to make money or achieve monthly cash flow? REIClub has tons of information for real estate investors to get started investing in Commercial Investment Property on our blog.
Here is some basic Commercial real estate investing tips that are helpful for real estate investors interested in this type of investment property.
What kind of properties are considered Commercial?
- Trailer/Mobile Home Parks
- Bulk Houses
- Strip Centers
Important Terms For Commercial Real Estate Investing
- CAP Rate = higher the better, at least 8%. Calculated by taking the income and deducting all expenses other than the mortgage, then dividing that into the purchase price
- Gross Income = rents + extras
- Effective Gross Income = Gross income less average vacancy
- Operating Expenses – taxes, insurance, utilities, repairs, management costs etc. but NOT including Debt Service
- Debt Service = Mortgage payment
- Positive Cash Flow. Cash flow = Monthly Profits
- Cash on Cash Return 10% or Greater – how long does your down payment come back?
Class “A” = new (less than 10 yr), modern, beautiful, great location
Class “B” = older (10 – 20 years), sites are OK, solid, middle class, stable
Class “C” = old (20 – 30 years), deferred maintenance, lower income, annoying and hard to manage
Class “D” = Boarded, vacant, undesirable, stay away
You can find over 35 real estate investing articles explaining these terms and the difference in commercial property classes here: Commercial Investing Training Articles.
How To Analyze a” Commercial Deal”
Items You Need for initial analysis:
–Debt Service per year (mortgage payment)
Purpose of “Initial Analysis” is to see if you want to look at the property at all. Example of Initial Analysis
l8 Unit Building Asking Price $250,000
Rented at $600 per month per unit ($57,600 per year)
Total expenses of utilities, insurance, repairs, property management etc. $17,000 per year
Mortgage payments if we financed $250,000 = $16,105 per year
Annual Income $57,600
Annual Expenses -17,000
Annual Mortgage -16,105
Annual Cash Flow $24,495
Here are some great investing guidelines & tips to use when evaluating a commercial real estate investment deal:
- It MUST cash flow or don’t look at it. At least $100 per unit per month at no down payment
- If you do not have that much cash flow you have an unrealistic seller or a property that is upside down
- Proformas are best case fantasies. Unrealistic and unreliable
- Operating expenses from sellers are understated. Verify every number
- Taxes can go up on sale – call assessors office to check if reassessed upon sale
- Get tax return from accountant and certified by accountant as true for real numbers on income
- Look for separate utilities
- You can fix a property but not location
This was a brief introductory into Commercial real estate investing and you can always access are FREE Commercial Investing Training Videos to pick up more information and tips on how to invest in commercial real estate.
Hope you have a great investing week!