When is it a good time to buy commercial real estate?

Carol emailed me- When is it a good time to buy commercial real estate?

Hi Carol,

That is a very popular question and it seems that everyone has their own answer. I often hear investors say that when interest rates are low you should be looking to buy. I hear some investors say “Lock in at a low interest rate while you can”. I disagree. I think the best time to buy is when the interest rates are higher or when the economy is in the tank, so prices are lower. Commercial real estate is all about the numbers. If the interest rates are higher, then the same NOI will support a smaller mortgage. If buyers can only get a smaller mortgage, then they will have to pay less for the property. Therefore sale prices tend to drop. If the economy is in trouble, demand for space shrinks and vacancies rise. As vacancies rise, rental rates drop and so do the property NOIs. A smaller NOI supports a smaller mortgage, so sale prices tend to drop.

When prices are lower I tend to find properties with much more upside. If you are fortunate enough to have cash, it’s time to go shopping. If you don’t have cash, it’s time to be creative. I tend to look for properties with owners who have owned the property for a long time. If they have owned the property for a while, there is a much better chance that they will not be under water with their mortgage if prices drop. Better yet, they might be able to offer some attractive owner financing. This saves bank and appraisal fees.

Here’s the kicker: If you buy enough properties when interest rates are higher and prices are lower and then sell or refinance when interest rates are lower and prices are higher, you just might be able to quit your day job!