Rental Properties Demands That You "Know The Numbers"
Commercial rental properties are bought and sold based on income. Net
operating income to be precise. But as a potential real estate buyer
(especially if you are a new to the business), you may often times feel
like you are at the mercy of the seller and/or their agent when it
comes to the operating figures for a building.
First of all, you should be weary of any
numbers provided by the seller. There is a reason that most
professionals in the commercial real estate industry call the property
pro forma statements provided by selling agents as "liar's statements".
Trust, but verify,
as Ronald Reagan was famous for saying.
if you can't trust the operating figures provided by the seller, how on
earth are you going to calculate a true NOI for a commercial property,
and hence its true value? Here's what I suggest (and what I have done
If you talk to seasoned real estate investors they
will tell you that they often look at hundreds of potential deals
they find one that makes sense. I highly recommend that you do the
Get To Know The Market For Commercial Rental Properties
you have looked at a few hundred pro forma statements for properties
for sale in your target market, you are going to start to get a keen
understanding for market valuations and to a certain extent (remember.
these are liar's statements) the expense figures for operating
commercial properties in this market. Whether you are targeting
apartment buildings, office properties or strip malls, you will be
gathering valuable information along the way and building a database of
sorts. (Make sure you hang on to and file away all of the information
you receive for future reference. I am a bit of a self proclaimed pack
rat myself but I have more than a few files of property data in my
office to refer to).
Here is just some of the valuable data you can collect...
- rental rates (by square foot, number of bedrooms etc.)
- repair and maintenance rates
- laundry income
- vacancy rates
Comparing Apples To Apples
operating figures that you gather through this process, although
unverified for the most part and not perfect by an means, will at least
give you a general idea of the industry numbers. Remember, the key to
valuing commercial rental properties is being able to compare apples to
Deconstructing The Commercial Property Liar's Statement
best way to make sure that you can trust the Income/Expense statement
for a revenue property that you are considering buying is to construct
it yourself. That is what I do. Simply take the figures that are
verifiable (rents, insurance, property taxes, utilities etc) and then
plug in the industry figures that you now have a handle on from your
database and voilà, you have a much more reliable computation of the
"real" net operating income from which you can now derive a market
value for any commercial rental properties that you are considering
making an offer on.
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