The Single Most Important Phrase in Commercial Real Estate

Updated on July 30, 2020

The single most important phrase in the commercial real estate business is “You Make Your Money on the Buy.”

What that 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 for a commercial property. you need to work to get the best price and capitalization rate (cap rate) possible before you get to the closing table. It doesn’t matter what you’re looking at; a class a office space, shopping center or class c apartment building, any real estate investment can be a better investment if you can secure a lower price. 

There are multiple things you can do to create value in a property; more effective leasing with potentially adding triple net leases, better management of your operating expenses, renegotiating with vendors, better property management, finding ways to boost net operating income (NOI), 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.

The only thing that can help you when you overpay is time. And hopefully, in time the market will go higher and bail you out. Instead of hoping and waiting, only purchase your properties “correctly.”

Focus on current cash flow, and potential cash flow if you are a value add player. Be patient. And vet as many transactions as humanly possible. More on sourcing deal flow next time.

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