WHAT DO YOU THINK IS THE MOST IMPORTANT NUMBER IN COMMERCIAL REAL ESTATE?
Is it:
The CAP rate?
The amount of Rent?
Your ROI? (Return on Investment)
The IRR? (Internal Rate of Return)
Your Rent Margin?
One of twenty other terms?
No, it’s actually very simple but something many, many investors get wrong.
If you get this number wrong, you’ll have no leverage in the marketplace, and no chance of growth or achieving wealth.
THE NUMBER OF UNITS IS THE SINGLE MOST IMPORTANT PART OF REAL ESTATE.
Miscalculating the number of units can impact your investment – it will limit your rent growth, your appreciation and your exit strategy.
Two to four units are considered residential. These types of loans are easy to get and that’s why so many people are foolish enough to get them.
This type of real estate doesn’t have the unit margin to support wealth creation.
These deals are so small that they can’t support a management company or any type of property amenities improvements. Without these, your time will be spent managing the property instead of having it be a passive income source. The lack of amenities or improvements will negatively impact property value and appreciation. You won’t have a viable exit strategy because there is no growth and the value will be based on comps in the area instead of the net operating income of the property. And because of its size, just one unit being vacant can sink your investment because suddenly twenty-five to fifty percent of your cash flow can disappear at the drop of a hat.
These are the deals that are foreclosed on first because they don’t generate enough income.
KEEP IN MIND, JUST BECAUSE IT’S EASY, DOESN’T MEAN IT’S THE RIGHT INVESTMENT FOR YOU.
Don’t be tempted to bargain hunt for an investment. An investment isn’t like going to Walmart or doing a Target run. An investment takes homework, knowledge, study and expertise.
This is your hard-earned income that you want to put to work to create more income.
Never think of it as a get-rich-quick scheme. It has to be a get-rich-for-sure scheme.
You want a commercial real estate deal. Commercial real estate is defined as five or more units. Ideally, it would be 32 units and a deal valued between $1.6 million and $2.46 million for your first deal. You should look at putting 25-35% down.
So, if you can’t save that much to do your first deal, then find an investor(s) or invest with someone who is doing the deals you want to do.
Again, you have to do your homework and know for sure this is the right deal, group or person for you to partner with.
By doing a larger deal, you can develop an exit strategy. You can determine if and when you should refinance and sell. A larger deal can let you do improvements to the property to drive up rent, which will drive your NOI (net operating income) and appreciation.
On a larger property, you can look at landscaping, exterior painting, security, management, pool, parking, gyms and amenities to improve the property.
This NOI improvement will drive up your value. Remember the banks will value your property on the NOI and NOT comps.
Larger deals also insulate your investment through market downturns produced by overbuilding, you’ll be able to handle more vacancy than a smaller property and you’ll be able to influence your net operating income faster and have it be more under your control.
Don’t do the little deals, find the bigger deals that require bigger down payments.
Do your work on the down payment of the deal. Do the extra work to buy the right deal.
Take the time to get your number right and where it needs to be.
