Unless you have not been paying attention to the news lately, you have heard on numerous occasions that the United States economy is in a very bad state. Recently, the Senate has approved an economic package that is designed to bailout the failing banking system. This would be the largest financial intervention by the Federal Government since the Great Depression. As far as I’m concerned, this package is just a limited remedy for our already struggling; it would be like putting a band-aid on a headache. I’m sure that you will agree with me when I say that $700 billion is an enormous amount of money by anybody’s standard. Quite frankly, I wouldn’t even know how to count that much money, and if I did, it would probably take me a lifetime to do so. Well, the banks have been rescued, but what about you and me. Where is our bailout? In these times, financial security is more a pressing matter than ever before, and it is up to you and me to address it far more seriously than we’ve done in the past. Investing in corporations is far too risky now. Investing in anything these days is far too risky now. Except commercial real estate.
Why Commercial Real Estate? - Millions of savvy real estate entrepreneurs are investing in single-family homes, and have been very successful. However, few have ever considered making the easy transition to commercial properties. Yes, I said “easy”. They think it's too expensive and too complicated to get into, and therefore never take the next step to the money-making, low-risk potential of commercial real estate. As a real estate professional myself, I would not advise buying commercial real estate solely because you have heard that a lot of people have made money in it. There are just as many people who have lost money in commercial real estate as there are those who have made money in it. So, why commercial real estate? First, the money-making potential is higher than that of residential. Second, it is much easier than residential real estate. Lastly, you can easily increase the value of a commercial property, and do so in as little as 30 days. This is not entirely true of residential real estate, and is definitely not true of stocks, bonds or any other type of Wall Street investment. Most importantly, anyone can invest successfully in commercial real estate without prior knowledge, experience, advanced academic education, or a real estate license. Needless to say, you will need to be trained properly how to do it.
Determine the CAP Rate - CAP Rate is a shorter term for capitalization rate. Cap rate is a discount rating that is used to determine the current or present value of a property that will create future earnings. The rate is calculated in a simple fashion as follows: Net Operating Income (NOI) / Purchase Price = Capitalization Rate For example, if you were to purchase a Class “A” office building for $1,000,000 and it produces $100,000 in positive net operating income (NOI) each year, then the formula would be as follows: Net Operating Income / Purchase Price = CAP Rate $100,000 / $1,000,000 = 0.10 = 10% Therefore, the commercial property’s capitalization rate is 10%, which would be the annual return on your investment. This would be considered a good rate of return.
Determine the Cash Flow - Cash flow is simply the movement of money going in and out of your investment, and is determined by three things: the annual rents, the annual expenses, and the annual debt service. The formula for cash flow is as follows: Annual Rents - Annual Expenses - Annual Debt Service = CASH FLOW The annual rents on your Class A office building is $100,000. The annual expenses are $40,000. The annual debt service is $35,000. This means that in order to find out what your cash low is, you would follow the formula: $100,000 - $40,000 - $35,000 = $25,000 Therefore, you would have $25,000 flowing into your office building each year
Determine the Cash-on-Cash Return - The cash-on-cash return is the ratio of annual before-tax cash flow to the total amount of cash invested. The formula is as follows: Cash Flow / Down Payment = Cash-on-Cash Return If you had put down $250,000 for your office building, your cash-on-cash would be: $25,000 / $250,000 = 0.10 =10%
Determine the Return-on-Investment (ROI) - The return-on-investment cash dictates how much profit you will make on your office building investment. Total Financial Benefits / Down Payment= Return-on-Investment (ROI) Let’s assume that before you bought your office building, you were informed that your total financial benefits were $35,000. You would figure out your return-on-investment as follows: $35,000 / $250,000 = 0.14 = 14%
Get Trained - To get started, you will first want to get some training. I suggest not paying thousands of dollars on boot camps. Many of them are rip-offs are don’t teach you the things that you need to know to become successful. Instead, I would recommend joining real estate organizations in your local area that specialize in commercial real estate. Also, you might want to join real estate forums on the web. Get on some of the real estate webinars. They are generally free and provide great information for both beginners and experts. Make it your mission to educate yourself as much as possible.
Get Going - Talk to commercial real estate professionals with many years of experience. Many of them can give you guidance on how to begin with your investment focus. They can teach you about financing options, and can help you find properties that will be correlate with your investment goals. Get good at doing commercial investment analysis, and learn how to do the computations just as we did them in the previous sections.
Get Serious About this Type of Investing Long-Term - As I had stated earlier, the purpose of investing in commercial real estate is not strictly to make a lot of money. Commercial real estate is very lucrative, and anyone can ultimately become wealthy investing in it. However, I wish to encourage you to think of your investing in commercial real estate as a long-term engagement. Your goal should be to accumulate wealth for your retirement, and for the future of your children and grandchildren.
- Invest in training. Training is an absolute must if you are planning for success in this industry.
- Seek out the experts. Talk to commercial real estate professionals, attorneys and other professionals about investing in commercial properties.
- Talk to other investors who specialize in commercial real estate.
- Join webinars and real estate focus groups.
- Join as many commercial real estate organizations as you can.
- Stay away from so-called experts selling their programs through boot-camps. Many of them are expensive and completely worthless.
- Stay away from scam artists.
- Don't bite off more than you can chew in the beginning. Start slow and increase your knowledge.
By ehow.com
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