Getting Started in Commercial Investing

Commercial Investing is great! A big plus was that it came with an established property management company at the helm. When you’re first starting out as an investor, there are lots to learn and there are lots of mistakes to be made. Small property mistakes usually equals small pains. That’s why it’s smart to start off with a small property.

What I want to do in this short training is very quickly share with you what’s in the heart of every commercial real estate investment deal that you will find and come across.

Capitalization Rate

Capitalization Rate (Cap Rate) is a key metric used in real estate investment to evaluate the potential return on an income-producing property. It represents the relationship between a property’s annual Net Operating Income (NOI) and its market value or purchase price.

Net Operating Income (NOI)

Net Operating Income (NOI) is a critical metric used in real estate to evaluate the profitability of an income-generating property. It represents the total income a property generates after deducting all operational expenses but before accounting for taxes, financing costs, and depreciation.

The net operating income calculation is NOI is equal to your gross rental income minus your expenses.

A huge part of world creation in commercial real estate is to increase the NOI, for example, through rent expenses and spends reductions.

Return on Investment

ROI is a versatile and straightforward tool that empowers real estate investors to evaluate and maximize their returns. However, it should be used alongside other metrics like Cap Rate and Net Operating Income (NOI) for a comprehensive analysis of property investments.

This is a term used frequently with your lenders. Here’s what it is. When you think of commercial real estate and you think of financing, at the heart of commercial real estate and financing is the DCR. It’s defined as the amount of cash flow available to pay your mortgage.

Building Classification

What I mean by building classification is you ever heard of a class building, b class building and c class? That’s the classification, that’s the box that we put properties into. I’ll give you a quick briefing on class A, B, and C commerical type of properties:

Class A
A class A building represents the newest and highest quality, the best location, highest rents. They attract the highest quality tenants. It’s just a beautiful building in a beautiful neighborhood, right? The most expensive thing. B class is a next step down.

Class B
Class B buildings are usually a little odor, but they’re still good qualities. They’re good buildings. Oftentimes value added investors target these types of buildings as investments since well-located class B buildings can be returned to their A class glory, right? Here’s your goal. Your goal is to find a B class building in an A class neighborhood and then you will renovate that building to get that A class rents. That’s your goal.

Class C
Let’s go to C class. C class is the lowest official classification and the buildings are odor. You’ll find section 8 tenants in them. They’ll be subsidized buildings. There’ll be odor. They’re built in the ’80s and back, right? If you are an apartment investor, these days today class C is the way to go because the ratio between the price per unit and the rents are still good.

Class D
All right, so there’s another class. It’s called a class D, D as in dog. It’s not an official class, but some buildings do fall in the class and I want you to stay away from them because they need extensive renovation. A lot of them are vacant buildings and it’s not for the beginner, right?

The class D are for experts who have deep pockets, okay? If you’re a beginner, don’t even consider a class D building.