Basic Commercial Property Tips from Todd
Blog #2 – Different Ways to Make "Bank" from commercial property investments
I heard about these ways from numerous sources and thought that the information was useful and provided some good background information for those considering taking the plunge in commercial real estate or residential multi-family investments. Here is the basic list.
1. Cash Flow (Rents-Expenses-Debt Service)
2. Principal Gain from Loan Pay-down
3. Asset Appreciation
4. Tax savings from yearly depreciation
Question to think about: Which item does not seem like it belongs in this group? If you are guessing #4, you would be correct as the tax savings is really a tax savings and deferral to a later tax year. I included number 4 as there are some really great potential benefits to accelerate depreciation if you have achieve "full time real estate professional status".
The other items 1 to 3 are pretty key to the success of the building. The tactical "stuff" like increasing rents and driving down expenses is a key part of any playbook and is even more effective when couple with an over-arching strategy for the building.
The question to consider is "What can I do to the building?" to change both the near term and long term investment returns. I have listed just several ideas of a multitude of potential ideas.
1. Do I have extra land around the building that I can split off and sell?
2. Can I change the interior of the building to add more rentable space?
3. Is there a way to create a step function change in the expenses by converting tenants over to NNN where they pay their share of the common area expenses, insurances and taxes?
4. Can solar panels be added to the top to increase my other income and reduce my utility costs?
You are probably thinking that these ideas all sound great but also cost money to execute and how do you decide which ones on worthy of additional investment. There is no "magic bullet" here but needs to considered within the context of the overall P&L model for the building that looks at the potential cash flow changes and potential building appreciation the occurs due to the Cap Rate Valuation Model. (Go to the first blog to read more on this topic).
Cap Rate Valuation Changes: This is important as the building valuation changes dramatically with increase the net income.
Building Value = Net Operating Income/Cap Rate.
Example: Increase of $1 in NOI
Cap rate of 7
Building value has increase by $14 (Change in Building Value = NOI Change/CR).