I’m looking for a top notch book that provides detailed information on how to analyze and evaluate commercial property deals.
Any suggestions?
That would be a very thick book. Everyone is totally different when evaluating commercial deals. I don’t know of any all inclusive books, but I’d suggest some income capitalization books for appraisers. Perhaps even take some appraisal continuing ed courses. Once you know the math involved, you will know which evaluation techniques are best for your business model.
Real Estate Valuation Principals and Applications, Ken M. Lusht first edition
Are commercial properties really that different? I own and have owned several commercial buildings and don’t understand why they are really any different than a SFH rental property. Obviously, there are a few differences in the leases and what is expected of the tenants, but doesn’t the value of any property always come down to cash flow and equity? You need positive cash flow to survive (and eat) and you want some equity so that you can get out if you so desire; for wealth building purposes; and because it is foolish to buy retail. Isn’t it just that simple?
I’m a very simple, black and white type of person. I just don’t get what all the hype is about commercial properties.
Mike
People just seem to use fancier lingo to describe the same thing, seems to be change in vocab rather than a change in principle.
Commercial properties are totally different animals all together. There is no black and white with commercial real estate for the most part…it’s all grey It’s one’s ability to see through the grey and understand the issues that sets good commercial real estate investors apart. I think the same can be said for residential real estate as well. Once you start reading about commercial real estate you will find out how much different it is.
Sean,
I have read about commercial real estate; heard presentations about commercial real estate; and I own commercial real estate. The leases are a little different and the demand can be quite different, other than that what is the difference? What is so gray about commercial properties?
I have owned many businesses (one with 50 employees). Whether your business is digging a ditch, selling multi-million dollar boats, sweeping floors, or leasing a shopping mall, every business comes down to two things: cash flow and equity.
What specifically are you saying is so gray about commercial real estate? Totally different animals? What issues?
If I could buy a commercial building for $1,000,000 and sell it 2 months later for $1,500,000, is that still a good deal?
If I buy a commercial building and rent it out at a profit, is that a good deal?
I don’t see what’s gray about that.
Mike
My feeling about commercial and residential RE is that they are identical in principle, as any business is. Very simple principles that are too often ignored. The complexity comes down to the details. There are many more moving parts with big commercial RE that take a more experienced person to handle. Some people get overwhelmed with one small residential project, they’d want to commit suicide with just the initial evaluation of big commercial RE. Structural engineers, environmental engineers, 50 page narrative report from the appraiser, 100 bids from contractors, dealing with the city on several issues, financing coming from 30 different sources, comprehensive market analysis, feasibility study, architects, zoning, etc. is enough to give some people a heart attack. That’s before all the real work starts!
I’m just like Mike in that I simplify everything to make it manageable to wrap my head around. But I am subconsciously aware of the basic principles and have a very good handle on the details involved.
What specifically are you saying is so gray about commercial real estate? Totally different animals? What issues?
First off is valuation and the difference between market value and investment value. How do investors truely who don’t know the field really know the difference…the anwser is they don’t. In one of my CCIM classes the intructor stated to me that cap rates are market driven. This man was a CCIM and a CRE. I agree with the statement in general but is a market cap rate going to meet your goals. The answer is “maybe, maybe not” There is no way to really know unless you understand what investment value is. The reason I say this, is because there may be a whole slew of instutional investors buying property in your area and they are the main driving force for the cap rates for your specific property type. As you know instutional investors cost of capital is cheeper than what the public going to get. Just that factor alone can effect investment value to you drastically, and there are several more issues out there that can effect your investment value. This was seen during the S&L scandal and to quote Alen greenspan “Irrational Exuberance”. Donald Trump fell into that trap. Over leveraging and vacancys hit and they couldn’t cover their debt service. Donald did not see that coming, maybe he did, but I doubt it.
The animals are financing, valuation, management, environmental issues and requirements, leasing and all the clauses that are to numerous to mention that differ between use. Which, are all different in many ways than residential property. Commercial leasing is far different than any residential lease could dream to be.
If I could buy a commercial building for $1,000,000 and sell it 2 months later for $1,500,000, is that still a good deal?
It depends on what it takes to get it to $1,500,000. Not to mention chain of title issues and prepayment penelties etc… If you do not know how to work with such issues it’s grey and even if you do it may not work in your benefit.
If I buy a commercial building and rent it out at a profit, is that a good deal?
If it meets your investment goals, then yes!