Can buying and selling commercial property for profit be done? In the past few years we have all seen how easy it is to make money on residential property; you simply buy a run down property, fix it up and re-sell it. Countless television programmes have spent many hours showing us how it’s done.
We have also seen how easy it is to do the same thing, but lose money instead. For some reason, these numerous home improvement shows didn’t really bother to show that side of things. But on the whole, it seems; buy well, watch your budget and sell well and there you go, Bob’s your proverbial.
But is it the same with commercial property or suite of offices or serviced offices? How do you add value in this highly specialised market? Basically you have two ways to do this.
Firstly, the property has to have problems you can fix. The classic value add properties are ones with problems, the bigger the problems the greater the opportunity for adding value and realising profits.
The obvious example is the abandoned, half burned down wreck of an 80 unit apartment complex. If you take this from zero net operating income, to 80% occupied and looking good, you will see a major profit at sale.
More typical examples are the 1980’s complex, with a 25% vacancy rate, in serious need of a makeover.
In every case the problems have to be ones you can fix. An inexpensive property with lots of opportunity to add value will lose you money if you and your property manager can’t fix the issues that beat down the previous owner.
Secondly, you must buy your commercial property at the right price. The biggest danger in value add investing is overpaying for the property. Just think, if you overpay for the property you have to add value just to get your money back at the sale. Drive a hard bargain and use due diligence to ferret out every issue that will cost money to address. Use all this information available to you to drive the price down or get other favourable terms.
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