The single most important phrase in the real estate investment business is “You Make Your Money on the Buy.”
We take that very seriously. Even though we work specifically in commercial real estate purchasing larger properties like apartment buildings, retail complexes, and office buildings, the phrase is also applicable for residential real estate properties and any purchase real estate investors are considering.
What Does the Phrase Mean?
What “You Make Your Money on the Buy” means is that the profitability of a deal is actually determined before you close on the property, not when you start managing it. The purchase price of an asset is the single most important factor in a transaction.
Every deal makes sense at the right price. The key is not overpaying. The very first item we examine when beginning our due diligence on an investment property is “what are the numbers?” because we need to make sure that the purchase price of a commercial property is going to be validated first by the rental income that it is producing and secondarily by the investment strategy we are deploying against that new asset.
How to Create Value in a Property
There are multiple things you can do to create value in a property and raise the cap rate: more effective leasing, finding great contractors, renegotiating with vendors, better property managers, etc. But none of those things will be able to help you if you overpay for an asset.
Your cost basis will always be your cost basis and there is no way to change that. Consider that before you ever sign a contract or send over a down payment. Commercial real estate investing can offer opportunities where you may be able to substantially increase the NOI across all types of commercial real estate assets, but the opportunity would have to be exceptional if the purchase price is outside of your typical criteria. Once you have set your criteria for purchasing, commercial real estate, investors need to stick to it. If something is outside of our criteria, we typically won’t entertain it.
Again, it takes exceptional commercial real estate deals for us to even consider going outside our criteria. Even then, we most likely will not do it. We invest in value add commercial deals that cash flow from day one and have significant upside potentials like multifamily, office spaces, and shopping centers.
If you want to “buy right”, you need to get busy sourcing deal flow. We look at 1,000 units to get to one purchase. Start building your broker connections in the areas where you’re interested in residential properties or commercial buildings. With commercial real estate property, most of our leads are coming from our real estate agents or real estate brokers that we work with. We have also worked directly with property owners,
The only thing that can help you if you overpay is time. And hopefully, in time the real estate market will go higher and bail you out. Instead of hoping and waiting for an investment opportunity to pay off, only purchase your properties “correctly.”
Focus on current cash flow, and potential cash flow if you are a value add player. Be patient; commercial real estate investment is not a fast game. Vette as many transactions as humanly possible and make some great deals happen.