Investing In Commercial Real Estate
When you are first getting started in real estate investment, you’ll learn that the natural path is to progress to ever bigger investments. You start with a rental home and once you’ve got a handle on that you move up to purchasing two, three or four more. Once you’ve got the confidence down to manage multiple properties the next progression is to move to bigger projects like commercial properties, apartments and mixed use properties.
At first, this progression into commercial real estate can seem intimidating. This can be a whole different ballgame but if you do it right, it can prove to be a very lucrative investment. Some of the wealthiest people in the country have made their fortunes through commercial real estate. Granted, success will not happen overnight but with the right planning and preparation, a good investor can reap enormous benefits. If you’re looking to expand your portfolio into commercial real estate, then you need to consider these four basic areas.
- Understand The Differences. Managing real estate is a bit like managing a family. With your first child, you begin to learn the ropes about parenting, with a second you learn that no two children are ever the same and you’ll feel more spread out with your time and resources. As you gain confidence though, you’ll feel that you can handle another one or even more. It’s kind of the same with real estate investment. Once you gain confidence and work with different properties you’ll see how different each one is and the unique challenges each one creates. Commercial real estate is a bit like having a child that is very different in temperament and personality to those you’ve had before. There will be a lot of differences, new jargon and calculations to overcome which will seem daunting at first but with time you’ll get the hang of it.
- Understand The Market. Managing commercial real estate calls for a much more in-depth look at the local market. When you own a residential property, you need to be only concerned about market prices and local demand. Managing a commercial property requires a lot more research and understanding of variables. You need to be aware of everything in the local market, changing demographics, what businesses have come and gone, what markets are in a boom period and which are going down. If business is not going well for certain companies, then how can you expect a new company to set up in your property in such a climate? Do diligent research of the market and understand what factors can influence your target tenant’s willingness to buy. A commercial property is only ever as good as the market it is catering for.
- Understand The Numbers. Perhaps the most intimidating aspect of commercial investing is all the extra numbers and variables you need to calculate for. It’s fairly straightforward how to calculate cash flow in a residential property but with commercial real estate, there are a lot of other numbers you need to factor in. Terms like Net Operating Income (NOI), Cap Rates and Cash on Cash return give you an idea of the new jargon and numbers that need to be understood. Don’t let the foreignness of these terms scare you off, they’re a lot easier to understand than you might think. Along with the extra jargon, there are also a number of expenses you need to be aware of such as property taxes, insurance, management fees and utilities which will vary depending on the number of units. The sooner you can familiarize yourself with these new terms and expenses is by going to a commercial real estate agent. They can provide you with a template for you to review and answer any questions you might have.
- Know The Financial Differences. If you’ve only ever handled residential properties before, it may come as a surprise what the differences are for investment loans in commercial real estate. You’ll need a strong credit score (over 680) just to get started. After that, you’ll have to put down a significant down payment of anywhere between 25% and 30%. There will have to be strong cash flow potential for a lender to even sign off on a loan and expenses for a loan can double or even triple what you’re used to paying for a residential property. Adding to that, most local lenders have a lower number of commercial loan programs, which can make getting approval a longer and more difficult process. It’s important to understand what you’re up against before you commit to anything. So, talk with a local commercial real estate agent for clarification.
Moving into commercial real estate investment is a big step and requires careful planning and deliberation, before even the first move can be made. Even the most experienced investors will need a little help when handling a thirty-unit apartment for the first time. Like you should in all your investments, move slow, have a plan and know what you’re getting into before signing anything.