These days if you listen to the radio for any period of time, especially satellite radio you will hear advertisements telling you how much money can be made buying and selling commercial real estate. This might be true, but it’s not quite as any as some of those advertisements will lead you to believe. Even though you will have to pay a commission when you use one, I would strongly advise that you get the assistance of a commercial real estate broker. These are specialists in the field. They should have a general idea of what properties are buying and selling for in the market area you wish to buy in, as well as possibly some properties that are not on the open market. Not all brokers are created equal though and you will want to ask some important questions to gauge the skill of potential brokers.
The first item you should realize is that even commercial brokers specialize on certain types of properties and may not be as knowledgeable on all types of commercial properties. Three of the main types of commercial properties are office, industrial, and multi-family. Each one has different ways of determining the value of a building. If you have a certain type of property you’d prefer to purchase, make sure you ask the broker if they specialize in that type. Ask them for sales comparable reports showing similar properties they have represented buyers or sellers with in the past year as proof. This will give you an idea of how active they have been in the market. Keep in mind, if they are working on a couple large deals, then those sales may have been very time consuming. Yet, if they concentrate on more high end deals, then they may not be the type of broker you are looking for as a smaller investor. This is another key in finding out the type of broker you are speaking with. If you are a lower end investor you will want to find a broker familiar with those deals, if you are looking for larger value properties find a broker specializing in those amounts.
Another question you will want to ask your broker is if they are recommending investing in buildings for the actual value in the building itself, or more as an investment based on the rents being paid by tenants. One term commercial investors use is a cap rate. This is a ratio of the net operating income over the price you pay for the building. Ask your broker for the average cap rate for similar buildings to the ones you are considering buying. If the cap rate of your property is much lower that will mean the ratio of annual net operating income compared to the price you paid is lower than what is average in the market. If a broker is recommending you buy a building with a low cap rate, you will want to ask why. It could be the previous owner was charging below market rents and you will have the opportunity to raise them as the current tenant’s leases expire (or they may have already expired), or possibly the building was not entirely rented out in recent years. Another reason could be because they feel the building’s value based on square footage and location could be underpriced currently and expected to go up in subsequent years. Keep in mind with an investment property you will receive two streams of income, net operating income, and the future income when you sell the property at some point.
If you are going to purchase a property that has a property manager already, get your broker’s opinion of that property manager. If they feel they have done a good job you might want to hire them to continue managing the property for you. Otherwise, you will want to ask your broker if they could recommend someone. There is a chance your broker’s brokerage may have a department that handles property management (or your broker himself may do this as well). If you have a quality property manager, then you can remain in basically an investor only role, and not have to worry about the day to day management of the property yourself.
One other key item to ask your broker about is sales comparable reports. These will tell you and your broker about other similar properties in the area that have sold recently. Ask your broker how many they have used to recommend the properties to you to purchase. Also ask to see these reports, keep in mind that how long a property has been on the market, deferred maintenance, occupancy percentage, expenses, and the types of tenants in the building will differentiate one sale from another. This means you want sales comparable reports with similar situations in those categories to the building you are looking to buy. Another question you will want to have your broker research for you is the local market in respect to tenants. Find out if it is expected that rental rates will be increasing or decreasing as a whole based on items such as absorption in the market.
The main point of this article is to point out to the casual invidual out there that investing in commercial real estate can often be confusing and challenging for people entering the business for the first time. It is not as easy as the radio ads imply, which say you can succeed based just on attending a simple course or buying a CD. If nothing else, at least consult with a broker first, in the end they will know a lot more about your local market than a book or a seminar will.