Is this a good time to buy a commercial real estate property?
Many people ask me this question and the answer is always the same: “You are not buying the whole market. You are buying a specific property in a specific market”. And no matter the market, the most important factors for success remain the same. The correct reasons for buying a commercial income producing property have nothing to do with the local comparable sales like residential real estate investing; they have everything to do with the size of the income and quality of the Tenant along with the lease and terms that go along with the deal.
In commercial investing you are the buying future streams of income that will be produced by the asset. So your success is almost guaranteed if you focus on answering the following questions during your due diligence:
1) How much is the property producing in net income?
2) How safe is the income? (Based on the Tenant)
3) For how long should I expect to receive that income? (Based on the Lease)
4) How much will the financing cost me? (Based on the Bank)
5) How easy will it be for me to keep the property? (Is the lease NNN- do I have deferred maintenance to deal with?)
6) How much positive cash flow will I make?
7) What is the potential for a higher and better use for the property? (Now and in the future?)
What other deals are out there? (To have an alternative option for the use of my resources)
9) Will I still have some money left over for cash reserves?
If you know how to go through these questions and based on your training can answer them with a high degree of certainty, then the market in general is absolutely irrelevant.
An untrained person looks at general data like “office space” occupancy levels in a city, and he/she sees that the number of vacancies have increased statistically so he/she panics before even looking at a specific property and who is renting, what is the asking price, what is the potential is etc.
I always say news is how you perceive it based on your mental models.
I find it a lot more predictable and accurate to forecast long streams of income on a commercial property with a quality Tenant who signed a long term lease with specific escalations than trying to speculate on a stock market fundamentals or futures, commodities, currencies, or residential cyclical investing.
What never ceases to amaze me is how little competition there is in commercial real estate. Most people are untrained and have no business model for this type of safe investing so they lose money in so many other ventures that are unpredictable or cyclical based on general market and political events.