Interested in purchasing a commercial real estate property? Before you make a decision, it’s important to develop a set plan for analyzing each option. That way, you can feel more confident about your purchase.
You could try to come up with a commercial property checklist on your own. Or you could simply use the metrics we’ve provided below.
These points will help you refine your search to only include real estate opportunities that put you in the best position to succeed.
Keep in mind that the person selling a commercial property likely has a long-term financial strategy of their own.
Understanding their motivation can help you make a more informed purchase decision. Is the seller a long-time owner looking to transition away from the market? Or is the seller simply hoping to distance themselves from serious issues with the property or location?
The Local Market
Gaining a firm grip on a property’s location is an important step when analyzing its merits. Don’t consider purchasing a property before you have a good feel for the population in the surrounding area and the state of the local economy.
Interested in purchasing a multifamily property, like an apartment building? The smart move would be to identify the median income for the area. That way, you can begin to determine whether or not tenants could pay the amount of rent you’d like to charge.
The general idea here is to search for a commercial property located in an area with a high population and thriving economy. Those conditions will put your multi-tenant or retail property in a better position to generate revenue.
If you plan to own a commercial office, apartment building, or industrial warehouse for a number of years, you’ll want to be sure that the building’s infrastructure is sound. Is the air conditioning or heating system up-to-date? Have there been recent issues with electricity or plumbing?
Discovering problems with the condition of your property after you’ve purchased it can lead to expensive repairs that cut into your long-term return on investment.
Commercial Real Estate Property Value
You can do some basic math to arrive at an estimated value of the multifamily property you’re reviewing. This underwriting work will pay off when you start to compare investment opportunities.
There are a number of ways to value a commercial property, but a good start would be to identify its net operating income (NOI).
To calculate the NOI, take the income generated by the property through various means and deduct all expenses related to those operations.
For a multifamily property, you would take the rental income, as well as any other income, and deduct losses from any vacancies and operating expenses. The result will be the property’s net operating income.
From there, you could take the NOI and divide it by the property’s total debt service to arrive at the property’s debt service coverage ratio.
In a general sense, the ratio tells you whether the property generates enough revenue to cover its debt. If the ratio is less than 1, then you know that the property does not generate enough income to cover debt payments.
You should work with commercial real estate loan experts to get a more detailed view into a multifamily property’s value. But these basic calculations should help you identify viable opportunities.
Once you get further along in the process and find a multifamily property you wish to purchase, the next step is to consider your financing options.
Commercial Direct, a division of Silver Hill Funding, LLC, can help you secure a flexible commercial mortgage, even if you aren’t able to provide the level of documentation traditional banks require.
Visit our purchase page to learn how we can get you the funding you need to purchase your multifamily investment property.
Zack North is the Director of Marketing for Commercial Direct. As a regular contributor to a number of top industry publications, Zack enjoys writing about topics that help investors and business owners approach commercial mortgage financing with confidence.