Last week, we introduced you to the commercial real estate business. This week, we present seven tips to finding the hottest commercial real estate deals.

1. Learn What Insiders Know

To be a serious player in commercial real estate, you will have to learn to think like a professional. For example, you will need to learn how commercial property is valued, which is very different from residential property valuation. Rent on commercial real estate is directly related to the usable square footage of the property. This is not the case with residential leasing, where you will see much higher returns on multi-family dwellings than on single family houses. Returns on commercial properties are usually much higher, and leases are much longer, making the business a little more stable. Lastly, if you are in a tight credit environment, make sure you have cash on hand. Commercial property lenders will often want to see 30% down first before they will approve a loan.

2. Make an Action Plan

Setting out parameters for your investment should be a top priority in any real estate deal. How much can you afford to pay? How much is your expected return on the deal? Who are key players? How many tenants are already signed up and paying rent? How much rental space will you need to fill? Will you work with a property management company or search for tenants yourself?

3. Learn to Recognize a Great Deal

The most successful commercial real estate investors know a good deal when they see one. What’s their secret? First, they always have an exit strategy: the best deals are the ones you can walk away from. Second, it is vital to properly assess a property. Walk the property and keep a sharp eye out for any damage that will require repairs. Assess the property’s risk and make sure that the property will meet your financial goals. If it seems too good to be true, it might be. Make sure there are not any hidden costs or problems with the property.

4. Familiarize Yourself with Key Commercial Real Estate Metrics

If you are going to walk the walk, you have to make sure you can talk the talk. Some common metrics used to assess properties include:

• Net Operating Income (NOI). The NOI of a property is calculated by valuing the property’s first year gross operating income and subtracting the first year operating expenses. Make sure the property has a positive NOI.
• Cap Rate. Any income-producing property has a “cap”—or capitalization—rate which is used to calculate the property’s value. Properties that are good candidates include apartment complexes, strip malls, and commercial office buildings. Cap rates are used to estimate the net present value of future cash flow or profits, a process also called capitalization of earnings. Cap rate can be help you to determine a property’s investment value.
• Cash on Cash. Commercial real estate investors who rely on financing to purchase their properties often adhere to the cash-on-cash formula to compare first-year performance of competing properties. Cash-on-cash takes the fact that the investor in question doesnt require 100% cash to buy the property into account, but also accounts for the fact that the investor will not keep all of the NOI because he or she must use some of it to make mortgage payments. To uncover cash on cash, real estate investors must determine the amount required to invest to purchase the property, or their initial investment.

5. Look for Motivated Sellers

Just as with any other business, customers drive the real estate market. Your job as an investor is to find them, especially those who are eager and ready to sell below market value. Keep in mind that nothing happens in real estate until you find a deal, which is usually helped along by an owner who is motivated to sell. This will typically be someone who has some pressing need to sell a property soon, making them much more willing to negotiate about price. Keep an eye out for this kind of sellers.

6. Talk to the Neighbors

A highly effective way to determine a commercial property’s value is to familiarize yourself with the surrounding neighborhood: talk to other owners in the area, mingle at open houses, and assess other vacancies in the area.

7. Expand Your Search

Don’t limit yourself by using only one approach to find new commercial real estate properties. Instead, use a three-pronged approach, making use of the internet, classified ads in local newspapers, and hiring real estate bird dogs to track down the best deals. Real estate bird dogs are freelance agents who can help you find valuable investment leads for a referral fee.