“The mathematician requires tact and good taste at every step of his work, and he has to learn to trust to his own instinct to distinguish between what is really worthy of his efforts and what is not.” – J. W. Glaisher
A big mistake a lot of people make when it comes to investing in commercial investment property is that they forget one simple thing: It’s All About The NET (Not Gross)!
The good thing is that this is not complicated math. It really comes down to rents less expenses. Take the total rents and other income, then subtract total expenses and you arrive at your Net Operating Income (NOI). This and this alone determines the value of our investment property. At least 95% of the time.
I recognize that there are many other benefits of being a commercial property investor, such as loan principal reduction and property appreciation. There may also be tax advantages in owning a commercial building through depreciation, depending on your tax circumstances. These benefits are great – especially when comparing commercial investments with stocks or bonds – but I consider these as just icing on the cake. Remember that the primary focus should be all about the NET, or Net Operating Income.
That is Garman Math 101. It should be your Math too.
Always keep in mind that it is not about the pretty color of the building. It is not about whether the building has garages, or balconies, or a TV room, or new maintenance-free siding. These features can add to the aesthetics and enjoyment of the property, but keep in mind it is all about the numbers, baby!
So your first job in examining a potential “deal” needs to be the numbers. Whether the property has a swimming pool is insignificant – it the numbers. Its the NET!
You see, the sad thing is when an owner dumps thousands of dollars in improvements into a property and thinks he will get his costs right back. No way. I see this happen all the time. Why? New siding did not increase his net income. It made the property look better but his cash flow is still the same. Numbers, numbers, numbers…it is all about the NET.