If you’re new to commercial real estate investing or are overwhelmed by the complexity of the jargon, fear not. Take a lesson from Pele, who believed that mastery of the fundamentals catapults us to greatness.
Fans used to ask Pele, the great Brazilian soccer player, how he achieved such mastery of soccer. He used to answer,”Everything is practice.” Pele understood that the path to greatness wasn’t spending hours perfecting the most complicated plays of the game, rather endlessly trying to master the fundamentals. Mastery of the fundamentals, his most difficult endeavor, catapulted him to soccer stardom.
Pele teaches us commercial property investors that when we’re looking for increasingly complex solutions in a market of disarray, through mastery of real estate investment analysis fundamentals, we gain the ability to see through the chaos to what really matters: understanding risk, return, and making well-informed, profitable investment decisions.
In my experience, if you’re just getting started in commercial real estate investing or have been investing for years, at least learn how to apply the discount cash flow model to value commercial real estate investments.
This method allows us to value deals with multiple variables in a clear, coherent, and informed manner. It involves the principles of time, value, money and requires you to take a multi-year approach to understanding how much money you are investing in a deal and how much you expect to get out. You also have to think about when these capital events will happen.
There are 5 elements to the time, value, money equation. You must consider how long you’ll hold the real estate investment, what interest rate you will achieve, how much initial investment goes into the deal, what the future value of the investment will be, and how many payments the investment will provide over the life of the holding period. These are critical elements to understanding every investment, not just when you’re getting started in commercial real estate investing.
Once you master the application of the discounted cash flow analysis, you’ll find yourself taking stock of tenant risk, interruptions in cash flows through these uncertain times, pinpointing exit assumptions, and making adjustments today to create investments that meet your acquisition criteria and profit expectations tomorrow.
By the way, where should we send your free 10 part email mini course? It’s 100% commercial real estate investing focused and you can get it here.