When it comes right down to it, that's the Million Dollar question, isn't it?
Unlike a house, commercial real estate is valued based on it's ability to produce income for the owner. The Maximum Offer Amount (MOA) is really based on the return your investment will make.
Think about it like this...
You have $100,000 you would like to invest. You have a LOT of options. Let's look at a few of them:
You could put it in an interest bearing savings account at your bank
You could buy shares of an EFT (Exchange Traded Fund) that holds shares of S&P 500 companies
You could invest it in commercial real estate
Your decision where to invest likely comes down to 2 things:
What will the return on my investment be?
How much risk is there that I will actually make that return?
If you chose to put your money into an interest bearing savings account at your bank, you might make a 2 or 3% return. However, there's almost no risk. The only way you wouldn't make that return is if the bank went bankrupt and it wasn't Federally Insured.
If you chose to put your money into an S&P 500 EFT, your returns would be dependent on the stock market's performance while you held the EFT. Over the course of the past 50 years, the S&P 500 returned an average of approximately 10.8% annually if you reinvested your dividends and didn't take your money out at any point. However, there have been times during the past 50 years where, if you were only invested for ONE year, you would have LOST HALF OF YOUR MONEY! Obviously, the stock market is a riskier investment than a savings account. But the upside potential is greater.
So what does any of that have to do with what you can pay for a commercial property?
Like I said earlier, your MOA is based on the return you hope to make. More importantly, if you are going to look for OPM (other people's money) for your investments, you need to offer them a MORE ATTRACTIVE ALTERNATIVE than they can find someplace else....like a savings account or the stock market.
Every investor will have unique requirements for what they expect. However, after doing this for over 30 years, we have found that most investors will be attracted to returns of 15% or greater.
Some investors, like your friends and family, might be willing to loan you money with the expectation that their returns will be lower. Again, our experience has been that returns around 12% will entice most friends and family to join you.
And finally, if you are investing for yourself, with solely your own money, the returns you expect are entirely up to you. Given our alternatives, we like to see at least a 10% return on our own investments.
PLATINUM SOFTWARE FORMS
There are two versions of the Platinum Software Form.
MAX OFFER PLATINUM SOFTWARE FORM
The Max Offer Platinum Software Form (or Quick Platinum Software Form) is formatted to help you determine a Max Offer at a 15% return.
You'll notice, when using the Max OfferPlatinum Software Form that the vacancy is pre-set at 5% and the expenses are held constant at 45%. The financing is set to terms that are consistent with what we are seeing in the market currently.
You plug in the ASKING PRICE, INCOME, and REHAB BUDGET and and the Quick Platinum Software Form calculates your Max Offer! Because it is set to generate an Offer Price at a 15% return, it will always generate an Offer Price that should work for your and/or your investors.
You can download the Max Offer Platinum Software Form HERE
PLATINUM SOFTWARE FORM
The second version of the Platinum Software Form allows for a little more manipulation.
For instance, maybe you've met with a local banker and you learn they are willing to loan money at a .50% less than the market rate if you put 30% down. You can adjust the Platinum Software Form to reflect those inputs. Or, you find out that the tenants pay their own utilities and you want to adjust your expense down to reflect that fact. You can make those adjustments as you dial in your deal.
Or, maybe you've been pitching the idea of investing in commercial real estate to your friends and family and they've indicated a willingness to invest if you find a deal that could generate a 12% return. You can calculate what your Max Offer would be at a 12% return.
You can download the Platinum Software Form HERE
The bottom line is this...most savvy investors are going to look at a deal and come to similar conclusions as to what the Max Offer price should be. There may be an outlier here and there. Maybe someone likes the building and is willing to pay more because they own other properties on the street and want to "complete" their collection. Or maybe, they grew up in the apartment you are looking at and for nostalgic reasons they are willing to pay more.
You aren't going to let emotions dictate your investment decisions. Stick to making offers that generate favorable returns and you will be on your way to a successful commercial real estate portfolio.