Investing in commercial real estate is never an easy task. On the one hand, it can be quite lucrative if you identify a good deal and make the most of it. But, being able to identify and profit on good deals is a skill few investors have. So, let’s go step by step on how you should analyze a commercial real estate deal and determine whether it is worth the investment.

Steps to take in order to analyze a commercial real estate deal

While many factors determine whether a commercial real estate deal is worth the investment, the process of analyzing it is relatively straightforward. You will almost always go through the same analysis steps when you want to evaluate the potential worth of a real estate deal. The more times you apply this process, the easier it will become. So, don’t get disheartened if it initially seems complicated or robust. Before long, you will be able to recognize the crucial factors of commercial real estate deals with relative ease.

Research the local market

The first step in analyzing a commercial real estate deal is to research the local market. You need to look into ongoing real estate trends and see how they impact the real estate you are considering. Before you invest in a specific deal, it is vital that you have a decent knowledge of the local market. That way, you can compare prices and avoid potential investment mistakes. Furthermore, you need to take the location of your real estate into account. Local demographic, job availability, growth trends, infrastructure development, and so on. All these can have a significant impact on a local level. So, make sure that you are aware of all the crucial factors that impact the potential value of your property.

Make a financial analysis

Every commercial property has some financial history. And, more often than not, that history will tell you much more about the property than previous owners could or are willing to. Therefore, when you try to analyze a commercial real estate deal, ensure you have a full financial report. Things like:

  • Income statement.
  • Balance sheets.
  • Cash flow statements.
  • Rental income expenses.
  • Debt service.

You also need to make a note of potential tax benefits and how they will impact your investment. These are all necessary to have a complete picture of the property in question. Some investors will take this information alone and determine whether or not a property is worth considering.

Check the structural condition

You’ll have a hard time finding a decent deal for commercial real estate that doesn’t require some form of renovation. Therefore, it is paramount that you are able to assess which renovations will be necessary for the real estate in question and whether any structural issues are deal breakers. You will need to check wiring, plumbing, landscaping, and any installed systems. If any repairs are required, you need to be aware of how much they will cost and how long they will take.

This step is especially important if you plan on moving your business to a new location. In this instance, you need to be absolutely sure that you can renovate the space to a desirable condition within a reasonable span of time. You can start relocating your business once you have finished renovating your real estate. Experts from Preferred Movers advise that you do so slowly and carefully. That way, you can adequately address any issues that pop up.

Outline the ROI

You should always keep in mind that commercial real estate investment is just that – an investment. As such, it is important that you outline whether it will be profitable or not. The professional term for this is ROI (Return Of Investment). And, to calculate it, you first need to outline how you plan on making money from the property in question. If you plan on simply having it generate revenue as is, there are specific factors that you need to consider.

First, you need to consider the NOI (Net Operating Income). This is the number you get when you take the gross income of your property (rental income, parking fees, etc.) and deduct the operating expenses (property taxes, insurance, utilities, etc.). Keep in mind that this figure is before income taxes or debt service. Then, you can outline the cap rate. This is when you divide the NOI by the property market value. The ideal cap rate is usually between 5% and 10%. These factors will help you outline whether the property will make you money.

Relocation costs

On the other hand, if you plan on moving your business to a new property, you need to consider other factors. Namely, you first need to consider the relocation costs. For instance, moving from New Hampshire to Boston and packing on your own is far cheaper than moving from New Hampshire to Maryland and hiring packing services to take care of your items. While a helpful team can take care of it, they won’t be cheap. And it is important that you factor their cost of service into your estimate.

Secondly, you need to be aware that your business will either have to function at a limited capacity or completely shut down during the relocation period. And not all businesses can survive weeks with little or no income. This is another reason why you need to be fully aware of the relocation process and understand what it means for your company.

Outline risks

Lastly, you need to outline the potential risks of purchasing a specific property. Knowing the history of the real estate in question will be quite helpful here. Some of them are suspiciously high vacancy rates, high tenant turnover, market risks, etc. These are all causes for concern. While not necessarily immediate deal breakers, they should be at the back of your mind while you analyze a commercial real estate deal. Just know that if an offer seems too good to be true, it probably is.

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