- October 25, 2017
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The idea of becoming a commercial real estate investor is attractive for myriad reasons. The benefits of commercial real estate range from steadier cash flow to lower vacancy risks. These things, coupled with the fact that it is a less saturated market with fewer investors, can make even the greenest investor feel rapt with opportunity. Often we hear stories of the investor who ends up making millions, but the stories of those who lose millions are much more seldom told, but very real. That being said, if you don’t know what you are doing, you are liable to wind up in the same traps that many investors have fallen prey to in the past. It is important to start the hunt for a good commercial real estate investment with a basic idea of the ins and outs of the market to avoid such pitfalls.
Know Your Options & Determine Your Budget
This may seem obvious, but with so many commercial real estate options out there, it is easy to lose sight of your target. Commercial real estate is not limited solely to retail or office space, but also includes apartments, warehouses, medical buildings, hotels, farmland, and industrial space, to name a few. Once you have decided which investment is right for you, come up with a viable budget and stick to it. For each property you look at, remember your budget and consider your net operating income. This term refers to all of the revenue and costs associated with a particular property. Ask yourself what you stand to gain by determining the fixed costs it will take to maintain the building (insurance, property management, utilities, repairs, property taxes, etc.) and subtracting them from your initial investment.
Learn to Think Like a Professional
For all of the new investors seeking commercial real estate opportunities, there are seasoned vets who are fluent in the rules of the business. When you can start thinking like these investors, you greatly increase your chances of commercial real estate success. The better versed you are the easier it becomes to make more positive and impactful decisions. Here are a few key points you should know if you are considering this avenue:
- It is important to know that the value of a commercial real estate property is directly related to the usable square footage that is available within the space. This is not necessarily true in residential real estate. Knowing this, it becomes apparent that multi-family dwellings such as apartment buildings or multi-unit retail spaces will offer a greater return on your initial investment.
- The length of a lease will greatly affect your cash flow as an investor. Commercial property leases are typically quite a bit longer than residential leases, adding another bonus to this form of investing.
- Know what is expected from you from a cash standpoint. Commercial real estate investors are typically expected to bring a down payment of at least 30% to the table.
- Have a keen eye! When searching available properties, be on the lookout for damages that might need either immediate repairs or costly repairs down the line. This can help you through the negotiation process or perhaps, even to avoid making an initial investment in the first place.
Location is Everything
Commercial real estate is no different from residential real estate in the fact that your location will be one of the leading factors in whether or not your investment will ultimately be successful. Although higher demand here will likely increase the price tag of the property, it will also elicit a higher return on rental prices. There are easy ways to gauge the demand for certain areas and properties.
- Know your neighborhood. Go to open houses or talk to property owners who have been in the area a while. Ask them about changes they have seen, good or bad, in the neighborhood over the course of their time there. This will help you to gauge whether or not a particular property is likely to depreciate or appreciate in the near future.
- Go to nearby businesses and do the same. Ask owners about fluctuations over the course of their rental agreements. When you are well informed about peaks and valleys over the course of the rental term, you can prepare ahead of time.
- Analyze the recently sold properties in the area (comparables) and include any future development. When going through this process, the general rule is to choose comparable properties whose square footage is within a 10% range (higher or lower) of that you are assessing in order to have the most accurate portrait.
Looking for a Great Commercial Real Estate Investment Opportunity?
By now, you’ve seen how important it is to be well-informed in your search and hopefully these tips have helped. Working with a successful commercial real estate brokerage firm, such as SVN, can vastly improve your chances of finding the right investment for you and avoiding many mistakes. Contact SVN and search through our properties today!