BUYING PROPERTY BY THE NUMBERS
I talked about Cap Rates in the last two articles I’ve written. Next, I was going to talk about Return on Investment (ROI), but I found a topic that maybe I should have discussed first…the different ways people analyze a property to purchase. Some are interesting, some are just “Rule of Thumb” methods to determine if a property is worth looking into. So, let’s start off:
PER DOOR AMOUNT: Some investors will want a certain amount “per door” when looking at a property. Say $200 per door per month or what ever number they came up with. Really it comes down to a Return on Investment that they have broken down per door of properties they like to look at.
PRICE PER SQUARE FOOT: I don’t understand this one, but I ran into this recently while showing a property. The potential buyer wanted to know what the price per square foot was and when I asked why, they said that’s how they buy property. I get how to determine it, but what does it really say about the property? Does it create cash flow? So many questions it does not answer!
GROSS RENT MULTIPLIER (GRM): A number times the total monthly or yearly rent that will indicate what the property is worth. That number is then compared to the asking price. You must be careful as every property is different. Are utilities included? Again, so many questions are not answered!
THE 1% RULE: The monthly rent divided by 1% (or what ever exact number is used) and you get a price for the property. Again, so many things are not factored in.
In all of these methods it is important to remember that you have to look at the whole picture. You need to look at what the performance of the property is currently and what it could be in the future. Are the rents too low because the owner has not raised them in some time? Are certain expenses outside of normal amounts because the owner has not taken the time to bid insurance or make updates to the heating system to reduce utility cost? What amenities could be added to reduce vacancy or raise rents?
It is so simple to analyze a property thoroughly and take into account different situations that might occur. Having a good commercial real estate agent helps as a second pair of eyes. They have the knowledge and resources to help you do proforma analysis. Then they can assemble that information to assist you in analyzing a property and making the proper buying decisions.
Rule of Thumb quick methods should be just a quick analysis to take a peek at a property and then act as a starting point to work your way to a full analysis. Never completely rely on these individual methods to make a decision. A simple spread sheet is easy to do and your commercial real estate agent can do these for you so you don’t waste your time looking at properties that do not fit your goals.
Next month we will dive back into what I believe is the proper methods of analyzing properties! As always, feel free to give me a call to talk about how we can help you sell or buy commercial property!