Out of all the top booming markets in recent years, the commercial real estate market is one of the most reliable growth markets. If you’re thinking about getting involved with commercial real estate investing, you’re setting yourself up for a bright financial future.
Here are five steps to ensure you get off on the right foot and start seeing serious returns.
1. Ask Yourself What You’re Trying to Get
When you’re looking into becoming a commercial real estate investor, you need to understand where your interests and motivations come from. If you don’t have a strong understanding of your financial and career situation, you could make a wrong move.
Think about what kind of property you’re looking for. If you’re looking for something to use for your own business and rent out part of, you’ll have certain requirements. If you’re going to just fix it up and sell it off to the first buyer you can find, you’ll have another set of things to look for.
If you don’t need to buy the property and could just lease it out, you might find you’ll leave some cash free to keep investing. Depending on your needs for cash flow, financing, and your ability to make a down payment, buying or leasing could have vastly different ramifications.
For an investor who is open to partnering up, they could end up being able to access more capital, more investments, and larger properties. If you’ve got a high-risk tolerance, be sure you’re not getting yourself in a position to lose money on your investment.
Some properties require you to put time and effort into them to bring them up to their full potential. Others simply require hiring the right property manager. If you’re not looking to invest too much time, you could put the right people in place to keep the building running.
2. Learn The Ropes
You need to learn some terminology when you’re first getting involved in real estate. There is a vocabulary and a whole slew of acronyms that might sound like a foreign language to you. The basics can tell you a lot.
When you take the time to learn about your “loan to value ratio” you have a better handle on what kind of cash you need. You’ll be less likely to end up underwater if you know how much money you need from a lender versus how much the property is that you want to purchase.
When you’re calculating the amount of money you could make on a property, you’ll be looking at something called “cash on cash”. That’s what you make every year versus how much you spent to invest. Your investment number could be your total buying number or just the cost of your initial down payment.
Remember to always factor in inflation on these figures. As it stands around 3%, bringing in $100,000 this year is a fantastic figure. However, that same figure after a few years will have the buying power of just $90,000 today.
When you’re calculating properties for rent or for sale, you need to consider your “usable” versus your “rentable” square footage. What you might be eligible to rent out might not all be usable. Angled ceilings, strangely designed corridors, or closets might contribute to your total square footage but you need to know how that figures into your sale.
3. Look At Several Properties
When you’re looking to become a commercial real estate investor, you need to think carefully about the money you invest. There are major sums at play, even if your initial down payments are small. Your contract could have you beholden to hundreds of thousands or even millions beyond what you currently have in liquid capital.
Take the time to consider many different properties over the course of your search for one. Don’t assume that the first properties someone shows you are the best either. When dealing with a broker, remember that they want to get rid of certain properties and so they’ll try to sell you those first.
Location matters a lot. Fantastic properties that are too far from where the action is could be cheaper but less desirable in the long run. Look at trends and how the city you’re investing in is building out so that you know whether or not going off the beaten path is worth it.
Make sure that the property you’re thinking of investing in fits the profile of where you want to go. If you’re looking to deal with manufacturing facilities, a building that houses tech startups might not be up your alley.
4. Seek Out Experts
When you’re on the hunt for commercial real estate, you’ll need some assistance to sort through all the steps. You should hire an accountant, a mortgage broker, a real estate lawyer who understands commercial properties, and a commercial realtor.
When you deal with complicated properties, you’ll need tax experts, appraisers, and even inspectors to look at the property itself. If you’re dealing with a local environmental issue or a rural property, you might need to bring in environmental specialists.
While you can do your own research, it’s always good to get an expert to help
5. Finance It
Most people don’t have the cash on hand to just buy a building outright. When this is the case, banks, credit unions or mortgage companies will be called in.
Depending on your credit, you might have to get a cosigner or a partner to go in on the property with you.
If the owner or the person selling the property is looking to get rid of it, they might help with the financing. With so many leasing options available, there’s no reason you shouldn’t be able to make your investment.
Try this calculator when you’re coming up with your mortgage potential.
Commercial Real Estate Investing Is Lucrative
When you’re considering commercial real estate investing, you can get involved as much or as little as you have time for. The more time you devote to researching and investing, the more rewarding you’ll find it to be.
If you’re thinking of investing in another country, check out our guide to what you should consider when moving across borders.