Friday, January 21, 2011

3 Things to look for in a Commercial Real Estate Deal


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The most important part of commercial property investing is finding the deal(s). The person who controls the deals holds the "keys to the kingdom". Every business has two core elements: marketing and innovation. With commercial properties, you are always marketing for three things: the deal, capital and tenants.

Finding the deal is the biggest and most exciting part of the real estate business, I think. It is simple but it is not necessarily easy. I love the research and the searching part of it. The discovery part is fun as well. And I love finding out who actually owns the property, because I may already know that person and that makes negation even better.

First you need to get in your head exactly what you are looking for as an investor. And that is you are looking for a motivated seller. You are looking for an owner who is ready to move his property on very advantageous terms. You are looking for deals that have "value plays". You are not looking for a seller that is thinking about selling, or that is not ready to sell. Take it from me, you can't convince somebody to sell if they don't want to - Just move on!

"Value plays" are items that you can improve quickly and capture the increase in NOI, such as increasing occupancy, enforcing late fees, charging for lost keys, and creating equity. The property you are looking at is priced under market and you can create quick value by acting on the "value plays" that you see. Most value plays are the result of a tired landlord, a motivated landlord and seller that you need to find.

Some reasons why an owner might sell at a discount are landlord burnout, a need for cash or poor property management by a third party. Again, the "why" does not matter; it has no bearing on the situation. Your job is to find people who are eager to sell at a discount.

The second thing you market for when pursuing commercial real estate deals is tenants. Marketing for tenants is what your property manager will take care of for you. But you have to be aware that if you do not keep your properties full, you are not creating value. If your property manager is doing his or her job effectively, then your occupancy rate should reflect that.

The third thing you market for is capital. There can be cash in the deal but it is an investor's cash and not yours. Or there may be no cash in the deal when a seller does all of the financing. You are always going to be attaching capital for and to your deals. As you do this business more and more people will know who the deal makers are and you will get noticed. Your first couple of deals may be skinny for capital, but just close one deal and see what happens.

Your ability to market for deals, tenants and capital, will greatly affect the types of deals you find and affect your ability to move properties. Do not neglect the importance of marketing in your commercial real estate investing business.


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