So you dream of building a real estate portfolio or you have watched someone build wealth through buying commercial property and it looks attractive. It really is as easy as buying the right property at the right time but how you buy it is key. There are many ways to make smart commercial investments but there are also many ways to make terrible ones and the goal is to have more smart then terrible at the end of the day. Using a few basic principles each and every time can get you off to the right start and help you avoid a hasty decision.
Price – This is simple. Does it align with similar buildings in the immediate area? If there are no exact or close properties, use a per square footage rate based on similar use properties. A 5000sqft property can(not always) have the same value per sqft as a 1000sqft property if the user and condition is the same.
User – If you are not the planned tenant, does the property have a stable lease in place? No? Then this is where much of the risk comes in. If you are needing to fill a space with a renter, you must know who the ideal user will be. You need to assess how likely finding a tenant to lease the space is and at what rate. Just because you wrote down a rental income on a sheet of paper does not mean that is reality. Do some homework on this.
Cash Return – There is no point owning a property if there is no return and cash or income is the short term way to win. After you take the cost of owning the property annually minus the expenses (be realistic) and add back in the revenue from rents, does it make you a return worth the effort. Some people are happy with a lower cash return due to the size of the deal but dont be afraid to be conservative on this. Rental income is key.
Appreciation Return – I hear it all the time. “I can just sit back and let it appreciate”. Sure you can, if it appreciates. What may seem like a low price or a deal may just be lower then before or then you expected. There are many places, especially the midwest that appreciation is terribly slow or non existent. Not everything really appreciates and having any idea of when it might be high enough can be a total crap shoot. Appreciation is only valuable when you sell or if it really happens.
Summary – Buying commercial property is a smart wealth building investment and can provide a very large income and net worth for the smart buyer. Using real numbers in a pro forma and being honest with the market will keep most deals in line as well as the emotions out of the transaction. Falling in love with a building is fine but don’t mix the charm with good investment and you will probably be all right. Glad to help.
Curt Whitesell owns WKRP indy Real Estate and has been in the Indianapolis Real Estate business for over 10 years and spent his first years learning all aspects of commercial management and brokerage. He has had great success in managing existing commercial projects and new retail and office developments. Curt specializes in building owner representation and purchases in the Westfield Indiana market as well throughout the Indianapolis Metro area. Curt is passionate about growing the local Westfield community and in his free time volunteers with Westfield Youth Assistance and raising 2 children with his wife Jennifer.
