The world of commercial real estate investing is continuously changing, and it’s especially changing in today’s post-COVID era. In terms of the market and the players, the way investors play to win deals looks completely different now versus a few years ago. For investors looking to grow their portfolio, who are finding deals, making offers, and not winning, it’s time for a change in mentality!
The number one mistake investors are making in 2022 is that they are making conservative offers worried more about receiving the highest possible return on investment (ROI) versus focusing on the most they can pay on a deal.
In the last decade, investors saw great success expanding their portfolio by making offers that were just enough. For example, if the broker intelligence supported evidence that a property should be purchased at a 7% cap rate even though the investor’s proforma justified being able to purchase at a 6% cap rate, the investor would still make an offer between a 7-8% cap rate and win the deal. In today’s world of commercial real estate, this way of securing the deal is no longer going to work. The commercial real estate arena is booming, with many more players steepening the competition than seen before. So if that investor wanted to win that same deal in today’s market, they would likely need to make their initial offer based on the 6% cap rate or lose out on the deal. For every offer an investor makes on a property in today’s market, there may be nine other offers on the table that they must outbid to win. This is why it is so crucial for investors to know the most they can pay out of the gates in order to give the best chance to win a deal.
Discover the key to securing multiple deals and the benefits an expanded portfolio has on the investor.
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The Key to Investors Closing The Deal 
For investors new and experienced in the commercial real estate market, submitting the maxim bid is the key to success in closing the next deal. This may sound like an insane concept to experienced bidders, however, with the current state of the market and a large amount of competition, investors will not win by trying to pay just enough.
The mindset that investors are only pitching the deal that produces the highest ROI may work out in closing one deal in the long run but to become successful in closing many deals of different types, investors must strategize to maximize their initial offers. Investors do not want to lose out on the potential profit of a deal by not playing to win.
How Investors can Submit the Max Bid and Win
The following are the most effective ways investors can ensure they submit the maximum bid suitable for them to pay:
- Completing a financial analysis
- Reviewing current assets
- Drafting a detailed proforma
The key to this method is not placing the focus on trying to outbid the competition. Investors must determine the most they can pay to make a deal make sense to them and then simply make the offer. This will ultimately give investors the best chance to win a plurality of deals in today’s market.
Benefits of Expanded Portfolio
In the past, most investors focused on the base hit to win a property or submitted the minimum bid they knew would win them the deal. As mentioned above, this tactic will work but not frequently, limiting the number of properties under an investor’s umbrella.
Looking at the bigger picture, don’t multiple streams of income sound better than just one? With investors focusing on closing more base hits versus trying to find the home run deal, they expand their diversified portfolio, taking them up in status as elite investors providing benefits like:
- The bigger, the better. The more diversified properties an investor has, the more income and notoriety their name will receive.
- With more profit, there will be a better option pool and class of efficient managers on the properties.
- The more notoriety an investor receives, the more willing others – firms, vendors, owners – will be inclined to do business with them.
- Owning more properties increases the marketing power. The more noticed an investor is, the more likely they are to close deals or be sought out for deals.
Two Ways to Make Money in CRE
There are only two ways an investor can make money in commercial real estate, and this stands on the fact that owning more, versus a little, can cause an extreme increase in profits while benefiting the investor in multiple ways. The more deals you can get in your pipeline, the more profitable opportunities will start coming your way. It’s a snowball effect.
Appreciation
One way investors can see a profit increase is through appreciation of the property equity value increase over time of ownership. The property value could increase through demand or value-added additions like renovations or property expansion.
Depreciation
Most hear depreciation and think of a decrease in value which in turn means a decline in profits. However, deprecation in real estate works a little differently. Depreciation is important for real estate investors because it allows them to deduct depreciation expenses for tax purposes, saving money over time.
The IRS understands that real estate investors will have to spend money to keep their properties up to standards and fight against deprecation, allowing them to balance out the cost.
At Lumicre, we specialize in helping investors successfully secure their desired properties and expand their portfolios. Our expert staff has great experience successfully closing deals on all asset types and meeting our client’s unique needs. Contact us today to see how we can help close your next deal.
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