The Azucena Take: The Value of Commercial Real Estate in a Market
One of the most common complaints a seasoned investor will have is "I don't want to buy real estate in [insert city] because it's too expensive". Some metros have indeed seen their real estate market jump in value, but that shouldn't deter someone from investing. While the barrier for entry is higher than before, it also means that the rewards could be lucrative.
First of all, comparing the property now to what it was worth several years ago is short-sighted. Smart investors need to look at the current market conditions and research into what could happen in the next five years. How much the property was worth last year or three years ago is irrelevant. Now, this is not to say that an investor should go ahead and pay $5 million for a duplex in San Francisco (don't ever make an impulse purchase).
The value of the property rises and drops as time goes by due to market changes. One should look at the cash flow value at the time of purchase and sale. An investor should be concerned with the following when making a decision (none of which involves its value in the past):
Current purchasing price
Cash needed to buy
Rates and terms for the loan
Cash flow today
Cash flow in the future
Price at the time of sale
An investor should not be concerned with what the property was worth but what it could be worth and how much cash flow it could generate. The value of a property could continue to rise or it could fall while also generating a solid cash flow regardless.
Regardless, it all comes down to an investor willing to research the market and take the risk for a lucrative reward.
The Azucena Take provides an inside look into the investment real estate market using the research done and data collected by Marcus & Millichap.