The Mother Lode in Real Estate Investing
The first thing to look at when investing in commercial real estate is the cash flow. Cash flow is the rental income less the operating expenses and loan payment. Some say that if the cash flow works everything else is gravy. If only it were that simple!
Due to the down payment and financing specific to each purchaser, the cash flow of each property is unique. What seems like a small amount, can make a huge difference over time. The difference between 8% and 9% on a twenty year, $250,000 mortgage is $37,975 over the term of the loan.
Determining the cash flow on a given property often takes due diligence, research, and sometimes a fair amount of estimating. Keen investors ask themselves ‘How can I make the numbers work?’ vs. “What are the numbers?” First you need to look at the income. Is it locked in, such as a long term commercial lease? Is it highly variable, as in weekly apartment rentals? Does the stated rent match rents received? Is the rent/lease at fair market value? Are there any opportunities to improve the lease income with better management of the property or perhaps appropriate capital improvements? A simple thing like renting parking separately might greatly impact cash flow.
In addition to looking at potential income, expenses should be examined as well. Are they complete? If advertising, maintenance, office expenses, temporary utility charges, etc. aren’t included in the cash flow projections, add them. If a property need a lot of your time, that may be considered an expense.
You have looked at the numbers adjusted them accordingly, and you think you can ‘make the numbers work’. There is one more thing to do. Real Estate should be looked as a long term investment. Ask yourself “How will the numbers change over the next 5 then 10 years?” If it still looks good …. Jump in!