Commercial Real Estate has unlimited opportunity.  You can drive down the street and find a handful of deals if you know what you are looking for.  One of the strategies that successful investors use is the “value play”.  The goal is to find a weakness in the property and fix it.

Instead of going after motivated sellers, these investors choose to look for motivated properties.  They assume the seller is serious about selling but not in a particular bind nor has a desperate need to sell.  What they do lack is knowledge.  Perhaps they do not see where they are not performing the best and you do.

You can come in and offer them fair market price based on the actual numbers of the property and the actual cap rate of the market.  Never buy any other way.  There may be a lot of upside in the property and you can see where you can increase the value and the sellers argument is justified in saying that the property will be worth more than what they are asking, but the reality is, that will take work to get it up to that price.  If it didn’t, they would just fix the issue themselves and sell it for more now.

That is precisely what you are doing: buying based on actual numbers, fixing the problem, and selling based on actual numbers.  The difference in net operating income is what increases the value of the property and creates a spread for you to profit from.  This is just like fixing up houses and selling for a profit but it goes a level deeper.  You are not just making repairs, you are also strategically increasing the cash flow of the property which makes it more valuable based on appearance and profit.

There are many different ways to find a “value play” deal and most of them are property specific; meaning that you will have to find the opportunity, you are not just looking for one type of value play.  In this article, we are going to discuss the three most common types of value plays so you have a good foundation of what you are looking for.

1.  Net Operating Income Value Play:  This is the most obvious, the easiest, and the most competitive.  If the seller is offering the property for sale, your competition will most likely spot the opportunity as well.  If you find the owner on your own, you stand a better chance of creating more equity.  Ideally, you are marketing to owners via mailers, calling, or advertisements on a regular basis.  You handle the calls yourself and ask them questions about their property.  Your main concern should be to find out how much they are receiving in rent for each unit, how long the lease terms are, and what their expenses are.  You can ask them for an income and expense report for the last 3 years and that will tell you most of what you need to know.  If they do not have that available, have your own template form ready to go and ask them to provide you with these details right there over the phone.  Once you have the income and expenses, you can compare them to the market.  An average property with professional management runs around 50% expenses.  If you know the income on a building for the year is $200,000, then you can take 50% of that away and come up with a net operating income of $100,000.  If the market cap rate is 8%, you can divide that 100k NOI by .08 and come up with a value of $1,250,000.  That is the property’s current value to you.  What you are looking for is some way(s) to increase that $100,000 net operating income after you buy the property.  If you can raise the rents and lower the expenses such that you can increase your NOI from 100k to 125k, you can now expect to sell your building for $1,562,500.  You have to factor in your costs and the time it takes to make that happen, but without too much effort you can see the power of the NOI value play.  For more training on this strategy, click here now.

2.  Highest and Best Use Value Play:  This is where you see an opportunity to change the way the property operates.  You may see a piece of land that looks like it should be a good golf course.  You may see a hotel that looks like it should be an apartment building.  You may see and apartment building that looks like it should be a hotel.  You may see an office building that looks like it should be condos.  Anything that is not serving its’ full potential for the market that surrounds the property is not currently serving its’ highest and best use.  One way to find highest and best use is to look at the appraisal report that was most recently completed.  The appraiser is usually knowledgeable about the zoning of the property and zoning of the property is given by the local government because they have determined that the subject property is best fit for X type of business.  This strategy takes a keen eye and is usually best for someone who has experience in the commercial real estate industry.  The income potential is huge but there is also more risk in case your idea wasn’t as good as you thought or the local government does not approve your plan.  For more training on this strategy, click here now.

3.  Emerging Market Value Play:  This one takes a good amount of work on the front end before you even buy the property but very little work on the back end after you buy the property.  You are looking for pockets of real estate that are growing in value more than the average for the area.  This is usually caused by an announcement of a new corporate headquarters and thus, many new employees.  Now, these employees will need more housing which will increase the demand for apartments.  They also spend their money at local restaurants, shopping, auto, grocery stores, banks, and everything else that we need to survive.  You can buy into these markets before the new jobs come in and watch the value of your property increase without any further effort of your own.  Of course, you need to maintain your property.  For more training on this strategy, click here now.

These strategies work great and provide a lot of income for those who use them wisely.  They do require a lot of experience and/or knowledge because the mistakes can be higher than the gains.  Find the deals that are the most obvious.  Analyze them carefully.  Then, take them to a trusted business friend who can give you a different perspective than you have.  Then, analyze it again and again.  Consider all of the upside as well as all of the risks.  Don’t do this on your own and make sure you surround yourself with a good team of experienced lawyers, brokers, accountants, and commercial real estate vendor.  For more training on these strategies, click here now.