If there’s one question that’s on the mind of every person who starts looking at commercial property as an investment vehicle it is this:
“How do I find good deals? And how do I know if they are good deals once I’ve found them?”
To answer that question I think it’s best to reset your expectations and make sure you are being real about your strategy.
As a beginner, it’s important you don’t get hung up on finding the deal of the century.
Why? Well, a few reasons…
It is possible to get insanely great deals, but you won’t just stumble across them on realcommercial.com
It’s going to take time to root out the really good deals and even longer to learn how to tell the difference…
…some of this is just experience… and that takes time.
My advice? Forget about the perfect deal.
By the time you’ve spent a year searching for “the one”, you could have bought any one of 50 pretty good deals and already have a year of rental income in your bank account.
If only perfection is good enough, you’re unlikely to ever take action…
…and it’s only through taking action that you learn, and by learning you can do better next time.
Sure, you don’t want to overpay, and it’s good to build in a bit of equity at the start, but if the numbers work, they work.
When you’re starting it’s too easy to get caught up in trying to get the perfect deal, the biggest upside, the biggest discount on purchase price… That’s all good but…
A bit more of a discount will be a drop in the ocean once you’ve owned it for 20 years.
Personally there are two things that I want to pay attention to more than anything else…
First is the yield. I know that if I can buy well and get a good yield that that will give me not only good cashflow but also god buffers to absorb any shift in interest rates.
Of course it goes without saying that annual increases in line with CPI are included and that if interest rates suddenly jump up then rents will automatically jump to compensate.
The second thing for me that’s important, as a very active investor is upside potential.
On the one hand a high yield will tell me how much more I will be earning and therefore how quickly I can get the money together to do my next deal…
But when you’ve got good upside potential you can sometimes dramatically raise equity much faster than saving the income of that property.
Back when I started, and one of the things that made me sit up and pay attention, was a vacant butchers chop I bought for $33,000 (obviously many years ago now). Once I had cleaned up the shop and got a tenant in there, the value jumped from 33k to $100k…
That’s a massive equity jump… and things are no different these days either… upsides and increases in the lease value can create big jumps in equity which you can then use for your next deal.
So having decided on what number you’re aiming for, how do you find a deal that hits it?
Everyone has their own process, but I’ll take you through mine. It’s probably quite unusual because:
I’ll invest at any distance from where I live, whereas most people restrict themselves to a certain area.
I’m driven largely by income rather than anticipating capital growth.
I have particular preferences for certain types of property. This has nothing to do with returns, or stability of a lease… there are plenty of amazing opportunities in all areas of commercial… this is just my personal predilection.
So bearing in mind that this is just my own method, here we go…
Personally, I start exploring different areas.
It makes sense to me to put numbers aside for a minute and focus on the characteristics of an area – either a broad area like a whole city, or a particular area of a town.
I’ll take a look at the economic profile of the area because that will tell me about the people that live there and the industries that are driving the economy.
That will help me work out what type of property is going to work best for that area.
Given that I have my preferences, that information might also tell me to move on and look elsewhere or to drill down and look deeper.
Then I’ll start to look at the kind deals I want. I can look at past sales, and make some calls to ask agents for the cap rates of the area for that kind of property.
It’s always worth asking more than one because the answers can vary depending on who you ask.
Then it’s time to go looking for the specific deals…
Because I’m not going nuts trying to find the deal of the decade, I’m happy just going through estate agent, looking online, or simply going down there and identifying properties that I’d like to own… even if they’re not for sale.
Sometimes you can start making enquiries of the agents and they might have heard of certain properties that might be thinking of selling… Some agents will even contact the owners and ask them if they are interested in selling.
So as I identify properties that look like contenders, I’ll enter the asking price, the likely rent based on the cap rates I’ve been given and all the running costs into my spreadsheet and see how the numbers come out.
If it’s a goer I’ll start by doing some due diligence and making a soft offer based on my numbers.
If an offer is accepted or the vendors come back with a decent counter offer… I start taking it seriously.
It’s better to stay reserved, not be attached to the outcome and take the deals you can get… In the long run you want the income as fast as you can get and keep equity in reserve for when that perfect deal comes up.