It’s all in the timing.
That phrase is truest when speaking of commercial real estate. This past year, we’ve seen market swings the likes you normally see over the course of a decade all in a single year. Is now a good time to buy? Real estate overall is dynamic, and commercial real estate isn’t immune to these fluctuations. The trick is knowing when to buy and how to find the unique properties you’re after, like commercial buildings for sale.
Buying Commercial Buildings for Sale
Unlike residential real estate, commercial real estate offers income-producing capabilities. If you find a property with the potential to make great money, it could be a wise purchase. Being the owner of a commercial building not only brings monthly cash flow but offers huge payoffs if you decide to sell. The most successful investors start with the question “why buy a commercial building?” What are your goals for the property? Always begin at the end – in other words, know your exit strategy prior to purchasing. Also, know how to assess risk with a keen eye.
Whenever you’re considering a property investment, walk the entire property with an eagle’s eye. Are there repairs that must be made? Literally, pull out a calculator and factor in the cost of property purchase and cost of repairs against future potential income. Does this particular property honestly work for your long-term financial goals? If it doesn’t, find another property.
It’s also good to have a basic understanding of key commercial real estate terminology. For instance, positive NOI, or net operating income, means the property brings in more money than it costs to operate it. Also, knowing what makes a good cap, or capitalization rate is key. The cap rate estimates future cash flow’s net value or net income after all expenses. More on these and other terms will be explained below.
Commercial Real Estate Classifications
Commercial buildings are properties used exclusively for business purposes. Here are the different types of commercial real estate:
- Apartments
- Offices
- Retail establishments
- Warehouses
You can further distinguish commercial property types, such as apartment complexes and office buildings, by class. The three main classes of commercial buildings are as follows:
Class A
These properties are highly sought-after, high-quality, and usually present less risk to the buyer. These buildings are normally newer, can ask for higher rents from tenants, and usually require little to no repairs aside from everyday maintenance. Properties in this class might be managed by professional property management companies and can be much easier to resell down the line.
Class B
A Class B commercial building might be a bit older and tenants might pay lower rents than those in Class A buildings. There may be some maintenance that’s been neglected and needs addressing. A Class B listing might present a higher risk than a Class A property, but it’s likely you can make a deal on the selling price.
Class C
Properties in this class present the greatest risk for investors. In light of the risk, these properties can be found for much less than the above property classes. These commercial buildings for sale are often over 20 years old. They may need significant renovations and often net much lower rents than a Class A or B property.
It should be noted that class description for all classes takes into account other factors, such as the location of the property.
Now, when it comes to other commercial property types, such as warehouses, industrial properties, hotels, and retail establishments, there are different designations. Check out how varied property class designations are in New York, for instance. Understanding the various commercial real estate types helps you become a better investor.
How to Evaluate Commercial Property
A common commercial property evaluation method is comparing cap rates, as mentioned above, of similar commercial buildings. To better understand this calculation, think of the yearly rate of return on a property if you paid for it in cash upfront.
But even if the cap rate calculation looks good, there are other valuation methods you use in conjunction with the cap rate. For instance: NOI, cash flow, cash-on-cash return, and gross income to name a few.
- NOI accounts for the income an asset brings in after operating expenses, such as vacancy, loss, and mortgage payment. This figure helps you calculate the cap rate.
- Cash flow is how much money’s in your wallet after expenses and mortgage payments.
- Cash-on-cash return measures an investment’s returns by dividing cash down payment by the amount of yearly cash flow produced by the property.
- Gross income is all income produced by a commercial property prior to expenses.
How to Find Commercial Properties for Sale
Many real estate investors begin investing in smaller listings and work their way up to commercial properties. Regardless of where you’re at in your investment journey, commercial listings can be sound investment opportunities. ProspectNow can help you locate them.
ProspectNow is a unique platform. Most real estate listing websites deal in either residential or commercial properties. For instance, sites like Zillow are considered residential listing sites. ProspectNow offers both types of listings, owner contact information, and more for a fraction of what other sites charge. Investors can find the deal just right for them, and brokers can help their clients discover listings not found elsewhere. We’ve been helping investors and brokers find listings since 2008. Contact us to see if we can help you, too.