"Upside Down" is when you owe more than the property is worth ... and it feels just as topsy turvy as this picture right here. Lots of Residential owners are feeling just like this at the moment.

What we are all looking for in Commercial Property is "UpSide"

"Upside" is a term for any extra profit boost you can find in your next Commercial Property. Any little thing you can do that gives you and your investors a little additional profit kicker along the way.

Another term for this extra profit is "Value Add".

You add value and then reap the extra rewards.

Upside comes from one simple source... Problems You Can Fix

That's right ... you are looking for properties with problems ... just make sure they are ones you can successfully address.

If you find a property with a Vacancy Rate of 15% in a market where the average is 5%. You MAY just have some Upside available to you there. It all depends on whether you can actually move the Vacancy Rate down to the Market Rate once you are the owner. And I assure you ... when you do, there will be a major return boost for your efforts.

Upside is a Three Step Process

1) Find the Problem

It isn't that hard to find problems in an ugly old Strip Mall or Apartment Complex with a bad reputation and a very motivated seller. Finding the problem is step one. This is the easy part.

2) Fix the Problem

The 64 thousand dollar question is how can you fix it? And it may be worth a LOT more than $65K to you.

Here is where you can lean heavily on your local team ... especially your Property Manager.

Your Property Manager will know the neighborhood, the market rents and standard amenities for this area. They may know this building well ... maybe they even managed it in the past. You can sit down with them even before you put in a Letter of Intent and brainstorm an action plan for addressing this property's problems and realizing the Upside.

Caution:

Keep in mind ... you are betting that you can fix a problem that the Seller couldn't. Don't get cocky here. Make sure you and your Property Manager can see a step by step solution built on strategies the Seller didn't use or didn't execute well.

3) Harvest the Upside

Remember the multiplier effect of the Capitalization Rate on any extra income you can retain at the property. The math is pretty simple.

Increase in Income / CAP Rate = Increase in Value

When you produce just $100/month in extra profit ... you add a full $20,000 to the value of the property at a 6% CAP Rate.

$1200 (per year) / 6% CAP Rate (0.06) =  $20,000 in increased Value

Become an UpSide Hunter

The search for "Value Add" properties with "Upside" is what drives certain Commercial Property Investors to ferret out the tarnished, tainted or downright tawdry properties and become rehabilitation or repositioning experts. When you turn around properties with significant challenges you can see annual returns of 30% and much more for your efforts.

It all starts with a simple question ...

The shortcut to finding extra profits in your next deal starts with a simple question to the listing broker,

"What's the Upside in this deal?"

Here's to safe and profitable investing.