Finding Profitable Commercial Properties

Profitability is the goal for any business pursuit and commercial real estate is no different. When you invest in a commercial property, you are essentially buying a business, one that has expenses, overhead, marketing costs, maintenance, and of course revenue to contend with. The obvious idea is to have the revenue exceed all expenses, producing profit (in this case monthly cash flow).

Since the goal of profitability is not really in any doubt, the real question that abounds is how to find a property that is profitable. There are always skeptics out there, many of whom will pose the following challenges:

· If a property is so profitable, why would someone be
selling it?
· There must be a catch.
· There must be more to it than simply making money as
that would just be too easy.

I generally take the stance of listening to skeptical responses to the value of commercial real estate but I let the negative connotation go in one ear and out the other. There is simply too much money to be made to listen too closely to the skeptics who would have you believe that what I am doing on a regular basis just isn’t possible for most people.

Skeptics aside, how do we actually determine profitability? This will be based upon several key factors:

· Monthly cash flow
· Equity/appreciation
· Leverage
· Depreciation
· Tax advantages

The monthly cash flow is the most important barometer for commercial property profitability because, if it is solid, the other benefits mentioned are simply icing on the cake and only make a good deal even better. For example, a 20-unit apartment building produces $240,000 annually in gross revenue ($1,000 per month per unit). Is it profitable? Only if the net revenue after all expenses, including mortgage payments, leaves you in the black.

Provided the monthly cash flow for a property is positive, consider the other factors that additionally enhance profitability of the property as a business. Each year, the property will have more equity, due to the fact that tenants are paying off any loan you have. Most commercial properties are financed for 15-20 years, meaning that several years of ownership can actually increase the equity position with some significance.

Profitability can also come from leverage, through equity lines of credit, business lines of credit based upon the financial strength of the property, or reinvestment of cash flow proceeds into other investments. Consider too the tax write offs from depreciation, mortgage interest, and many other fixed expenses, and commercial property can be a hugely profitable business for you to consider.