Commercial real estate property typically refers to retail space, industrial, office buildings, warehouses, mixed-use, and multi-family apartment buildings. Commercial real estate investing offers numerous potential benefits to the smart investor. The many advantages of commercial real estate investing include steady cash flow and high-income potential. But before you decide to delve into the many facets that are real estate investing, be sure to complete your due diligence and ensure the property coincides with your commercial real estate investment strategy.
First: Do Your Research
Investing in commercial real estate requires completing your due diligence. Your due diligence should include understanding market demand, reviewing financial documents including tax returns, balance sheets and profit and loss statements. As appropriate it should also include conducting property inspections, a financial proforma, and any other necessary research so that you're able to make a sound investment decision.
What Type of Commercial Real Estate Do You Want to Invest In?
Investing in commercial real estate property can be a complex transaction. First, you need to understand if the potential property you want to invest in is the right investment for your financial needs and goals. Not all commercial real estate property is alike. Commercial real estate has a wide range of classifications, including industrial, office, retail, multi-family, and particular purpose such as medical office buildings. Other types of property are self-storage, elder care, land, and hotels. Commercial real estate types perform better than others based on the supply and demand of the specific area. It is imperative to know how to identify the asset type that is most profitable and offers the most significant opportunity in the current economy.
Know the Market You Want to Invest In
Before investing in commercial real estate, it is crucial to know that every market is different. When you invest, you're investing in a specific geographic location that has its own unique needs. Certain property types do well on a broad level, but after completing your research, an abundance of property you may want to invest may exist. Often, investors fail to conduct the market research needed to determine the potential risk of market saturation.
Understand Commercial Real Estate Financing
Commercial property financing is typically different from residential property. Many commercial real estate opportunities require investors to meet higher income or net worth standards while also making a more substantial financial commitment. Understand the meaning of the terms associated with commercial financing. Commercial financing typically explores the following terms and conditions: a fixed interest rate, variable amortization periods, cash reserves and triple net leases..
Interest Rates
Interest rates for commercial property typically depend on the current prime rate (the lowest rate of money borrowed commercially). Bank terms and interest in product types can vary widely based upon their current portfolio of loans.
Amortization Period
Common amortization periods for commercial real estate is 15-20 years. For some multi-family projects it is not unusual for terms longer than this. A loan with a shorter amortization period will have a lower interest rate. Investment properties typically require a minimum of 25% in equity and if the property does not project positive cash flow from day one, equity requirements become much greater and will require the backing of a strong financial statement from the borrower.
Triple Net Leases
If a property owner leases space in a commercial building to a business using a triple net lease, the tenant who rents the space is responsible for the building's property taxes, insurance, and any maintenance and repairs required for the term of the contract. However, you must be careful to fully understand the terms. Sometimes a triple net lease will require the owner to be responsible for the exterior maintenance of the building and parking lot. Clarity on these items is ever so important.
Commercial Real Estate Investing Benefits
Deciding to invest in commercial real estate can be very rewarding, both personally and financially. Investing in commercial real estate can help to secure future wealth. It allows the investor to utilize their investment for tax benefits and allows them to increase their investment portfolio.
Avoid Commercial Real Estate Mistakes
When you decide to invest in commercial real estate, it is essential to know what to do and what not to do. Mitigating financial risk is as important as deciding what type of real estate in which to invest. Some common mistakes to avoid are improper valuations, financial ignorance, not completing your due diligence, and not working with a team you trust to do the job you ask of them.
Investing in commercial real estate can seem daunting to a beginner. Knowing how to mitigate risk is imperative if you have a set of systems to implement a successful strategy. However, the advantages of investing in commercial real estate are numerous if you are willing to complete the necessary research required for a successful strategy. With the help of commercial real estate experts and the proper financing, earning passive income from commercial real estate makes it a worthwhile endeavor to invest.
