The Sweetest Aspect of Commercial Real Estate Investing

Without a doubt, one of the greatest aspects of commercial real estate is the tremendous value of the properties that are out there and available for purchase. The natural question arises, ‘What determines value?’, and that is perhaps why you’re reading this.

The first determinant of value has to do with how you find your property deals. I have found that the greatest path to value comes from uncovering the diamonds in the proverbial rough. This means building your business upon a foundation of networking, rather than just searching through open networks like the MLS. While there are deals to be found here, they are often not the best ones.

The real gems come from referrals. Referrals come from other investors, bird dogs, and team members who “know someone who knows someone that might have a property they might want to sell”. I think you see what I am getting at here and the better you are at setting up these kinds of professional networks, the more referral deals you’ll have come your way. Sure, not all will be true deals but it will mean more potential deals coming across your desk, allowing you to better play the numbers game.

The second aspect of value has to do with the cost per unit of commercial real estate. In this regard, commercial properties that are good deals are almost always going to have better cost per unit value than single homes. For example, a single family home that rents for $800 a month in Market X has a market value of $100,000 and an approximate cost per unit of $900, not even really accounting for property maintenance or management.

Now, let’s consider a 4-unit apartment in the same area that commands the same monthly rent. In most markets, the price would be less than the value of four individual homes, in this case less than $400,000. That inherently improves the value of the property, on a cost per unit basis. Add to this that the fixed monthly expenses (e.g. taxes, insurance, maintenance, etc. are for one building instead of four, and you should quickly see how value builds with commercial properties.

Taking the model one step further, would a 100-unit complex be worth 100 times the value of a single home, rents being equal? Not likely, and the cost per unit would likely be far less than for a single home. This is just the tendency in most any real estate market in the country, and when you consider the tremendous boost in value that this gives you, the underlying value of commercial real estate becomes much more clear.