Overpaying for an Apartment Building Could Get you a Real Estate Steal

There are many commercial investment advice sources out there that tell you never to purchase a commercial property based on its potential to bring money in. The safer and more concrete way to invest is in a commercial property currently performing well.

This is very sound advice and you see it everywhere for a good reason, but sometimes it doesn't match up in every commercial real estate investment situation. Say you are looking to purchase an empty apartment building. It is vacant, not one renter.

Looking at the current numbers the net operating income or NOI on paper is negative. Applying a cap rate to the NOI would come out with the seller needing to pay the buyer to purchase it, but that is never going to happen of course. Sometimes commercial real estate investment rules need to be broken because they just don't apply or make sense.

When looking for a commercial investment property most people want a value-add opportunity.   So let's get back to that apartment building. Say you find a building with rent 20% below market values and a vacancy of 25%. You find that the local market vacancy is 6%. You determine with this building that in one to two years you can add a large amount of value upon stabilizing the asset.

Applying a cap rate to the actual current financials of the building might not give an accurate value of the property. This may not make you competitive enough and you might need to overpay.

Read More: What you should know about buying multi-family properties

If you come in with an offer of the value of the property at actual net operating income you may not be offering enough for the value-add deal and could lose out in the purchase. Paying a little more than the building is worth would make your offer a little more intriguing.

With a value-add property, it is best to put an offer on the table that is a win-win situation for all parties instead of losing out on the deal altogether because you fought hard to stick to your actual financials in the negotiation process.

Before you get excited and sign paperwork for a building that may be overpriced, make sure it still meets your minimum investment criteria. If it is not going to bring in your minimum expectations then don't purchase the building for more than the actual financials show.

it is always more conservative and a good choice to underwrite an investment on actual performance, but some add-value properties will allow you to pay a little more and still meet that minimum financial criterion. Sometimes paying a little extra will help you get a great deal on a value-add opportunity.

For more information on purchasing commercial properties in Minot please browse our website or contact us at any time.