Here it is! Apologies for my lack of photography skills.
I just purchased my first commercial real estate investment property. Diving into the commercial world is something that I've wanted to do for many years but have always been too afraid to do, and I finally took the plunge.
But enough about me. You probably know how it works in residential real estate investing, right? Get a loan. Buy a home. Rent it out. That part is pretty similar in commercial, though I might explain some of the differences later. For now I want to tell you how to create value in commercial real estate.
Now it's always easier for me to compare to residential because that's what I know. In residential, for your house to go up in value, the other houses in the area have to go up in value (because we value a house by seeing what the exact same house next door just sold for). It's called the comparative or comparison approach.
In commercial it's not based on comps - it's based on income. Let’s say warehouses in your area usually sell for a “7 cap”. That means your annual net income is 7% of the price, so $70k income on a $1mm warehouse.
Now if you do something to make that $70k annual income go to $90k, at the same 7% cap rate, the value of your warehouse is now $1.29mm, or a gain of $290k by adding $20k of annual income (the math is $90k/.07=$1.29mm)
So, the way to increase the value of your commercial property is to increase the income, and you can do that by reducing expenses, raising rent, or adding value somehow.
I know this was math heavy so I’ll leave it here. What questions can I answer for you?
