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Successfully Investing In Commercial 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.

So, 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 for years).

If you talk to seasoned real estate investors they will tell you that they often look at hundreds of potential deals before they find one that makes sense. I highly recommend that you do the same. Why?

Get To Know The Market For Commercial Rental Properties

After 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
  • etc.

Comparing Apples To Apples

The 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 apples.

Deconstructing The Commercial Property Liar's Statement

The 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 voilĂ , 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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