When it comes to investing in commercial property at a significant discount, the short answer is yes, it can be done. However, there are several factors to consider, including market conditions and negotiation skills. Here, we will explore the key aspects of investing in commercial property at a discount, as well as how to incorporate residential investment values into your deals.
Market Conditions and Discounts:
Properties are typically listed at asking prices that reflect the prevailing market conditions. To secure significant discounts on commercial properties, negotiation skills are crucial. You must make the deal appealing to the seller and show them why selling at a discount is in their best interest. Keep in mind that market conditions play a significant role in the pricing of commercial properties.
Observing Market Trends:
Watching the market is an essential part of the process. Properties that initially seem overpriced may eventually see price reductions. It’s important to monitor these properties as they drop in price. Utilising tools like Trello can help organise and track properties that show potential for a discount.
Understanding Investment Values:
When evaluating a commercial property, it’s important to differentiate between investment value and bricks-and-mortar value. Investment value is based on the income potential of the property and is often calculated using a capitalisation rate. On the other hand, bricks-and-mortar value represents the property’s intrinsic worth. It’s common to see residential and commercial components in mixed-use properties being valued based on their investment value.
Calculating Investment Value:
To calculate the investment value of residential properties within a mixed-use property, determine the market rent for each unit and apply the appropriate yield or capitalisation rate. Residential properties often have a minimum yield expectation of 6.5%. You can adjust this rate based on the market’s current conditions. For example, if the rental income is £20,000, and the market yield is 6.5%, the calculated value would be £307,692.
Incorporating Residential Values:
By understanding how the residential component is valued, you can negotiate effectively. The bricks-and-mortar value of residential units in mixed-use properties is often higher than their investment value. This knowledge can be leveraged to secure a discount on the commercial portion of the property. Negotiation is a crucial skill when dealing with such scenarios.
In summary, the right time to invest in commercial property at a discount is not strictly dependent on timing but rather on market knowledge and negotiation skills. It’s essential to monitor the market, evaluate properties, and recognise trends. Understanding the difference between investment and bricks-and-mortar values is vital when negotiating for discounts. Keep an eye on properties that repeatedly reduce their prices and leverage this information to your advantage.
Investing in commercial property at a discount is a feasible strategy with the right approach, even in a dynamic market. Always remember to negotiate effectively and be adaptable to market conditions. By doing so, you can secure properties at significant discounts and enhance your real estate investment portfolio.
PS Did you listen to last week’s podcast on ‘How to purchase commercial property’, if not you can by following this link.