Real estate investment is a highly competitive arena that requires a great degree of due diligence. Investors are risking a considerable amount of capital in order to achieve a certain level of profitability. Although, there are many types of investors, they can be classified in three broad categories: users, pure investors, and developers.

 

There are four main property types:

Office, Retail, Industrial, and Multifamily

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Office: Office buildings are rated either A, B or C. Class-A properties are the most modern and have numerous functional upgrades. Class-B and C buildings are older and may be less functional. Highest rents are paid for Class-A space.

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Retail: Types of retail: Strip Centers that service a small area and have tenants like nail salons, dry cleaners and flower stores. Freestanding Stores hosts single tenants. Neighborhood Centers usually are anchored by supermarkets and house multiple smaller retail tenants. Regional Centers provide general merchandise activities and are most commonly built as indoor malls.

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Industrial: Companies that specialize in distribution, manufacturing, production, and warehousing.

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Multifamily properties can be as small as a duplex or a large apartment complex.

 

Mixed-Use developments may consist of a mix of office, retail, and residential.

 

Other types of commercial properties include: Nursing Homes, Movie Theaters, Hospitals and Hotels.

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Advantages of Investing in Commercial Real Estate:

1) Equity buildup, 2) Cash flow, 3) Tax benefits, 4) Increased leverage, 5) Profitable rate of return, 6) Monthly income stream, 7) Steady rate of appreciation, and 8) It's Tangible.

 

Disadvantages of Investing in Commercial Real Estate:

1) Illiquidity and immobility, 2) Large initial investment and transaction costs, 3) Imperfect market, 4) Increased burden of management, 5) Tax burdens, 6) Government interference, 7) Economic downturn, and 8) Obsolescence.

 

Income properties are leased; therefore, the most obvious income a property produces is the rent paid by tenants. An important part of assessing the viability of a real estate investment is obtaining accurate information about the tenants. The investor should obtain a current rent roll, copies of the lease agreements, and the existence of any common area maintenance (CAM) fees. This data will give the investor an idea of how each lease agreement affects the income stream. Before committing to an investment, investors should analyze the financial information and perform a lease audit to evaluate the quantity, durability, and quality of the rental income produced by the property. An investor will examine the income and expenses of a commercial property. The investor will analyze the operating statement to measure the income properly. Commonly used measures include potential gross income (PGI), effective gross income (EGI), operating expenses, and net operating income (NOI). These measures are used for all types of investment real estate. Operating expenses include, but are not limited to, items such as property management, insurance, property taxes, utilities, and maintenance. Net operating income (NOI) is the income remaining after the operating expenses are deducted from the effective gross income, but before mortgage debt service and tax depreciation. Net operating income is probably the best value indicator for income property since it most accurately reflects the income for any given property. To calculate NOI, an investor deducts operating expenses from effective gross income (EGI).

 

Techniques used by most investors and brokers to analyze commercial real estate value:

Gross Rent Multiplier (GRM): Sale price ÷ annual gross rent = GRM

Capitalization Rate (Cap Rate): Year-1 NOI ÷ sale price = cap rate

Cash-on-Cash Return: Year-1 cash flow ÷ initial investment amount = cash-on-cash return

 

Working with Brokers

Commercial real estate investors want to maximize returns by getting a full view of the existing market. For that reason, it is advantageous for you to establish relationships within the brokerage community. You may be asking, "Why do I need these brokers on my side?" The answer is that commercial transactions are often back-room deals, whereas residential transactions are fairly public. Commercial brokers deal with owners and investors every day and should have a good grasp of possible investments. Lastly, brokers bring a sort of detachment to a deal that can help lessen tensions between the buyer and seller. While they are personally involved, it is their job to effectively keep communications open. The best brokers can sense when a transaction may be in danger just by the tone of the listing agent or owners’ expressions.