Real estate investing can be lucrative, but it takes time to learn the trade tricks and become an expert. Suppose you’re interested in breaking into commercial real estate investing. In that case, there are some things you should know upfront about what kind of investment you’re getting into and how to get started with minimal risk and maximum return. Let’s take a look at what you need to know about getting started in commercial real estate investing so that you can take advantage of the amazing returns this market offers while staying on top of your business and capitalizing on its full potential.
What is Commercial Real Estate Investing?
Generally speaking, commercial real estate (or CRE) refers to property that is rented or leased out for business purposes. For example, commercial real estate is considered office buildings, shopping centers, and restaurants.
CRE includes both buildings and land. Investing in real estate generally requires one of two things: equity or leverage (which is generally easier). Equity means using your own money; leverage means using other people’s money.
For example, if you buy a building with $100,000 of your own money and then use that building as collateral to borrow $700,000 from another party (in exchange for interest), you have leveraged your investment of $100,000 into more than $800,000 worth of investment.
How to Get into Commercial Real Estate Investing
This industry is highly saturated; however, here are a few things that would assist you in your journey;
Set a goal
Before investing in commercial real estate, it is important to have a goal in mind. What do you want to accomplish with your investment? How much money are you looking to make? These are all important things to think about before undertaking a new endeavour.
While having a goal in mind is important, it is also important to know when to change your goal. When the commercial real estate market is booming, it can be easy to get carried away with the profits, forgetting about the risks. It is important to be flexible and willing to change your goal as the situation warrants.
Research the market
When it comes to getting into commercial real estate investing, the more you know, the better off you will be. To make the most money possible and have a high chance of success, it is important to research the market and know the trends.
There are many different ways to research the market regarding commercial real estate investing. You can get on sites such as Zillow, Trulia, and REALTOR.com to read about the current market trends and articles and get real estate investing advice.
You can also attend real estate investment events, such as real estate investment expos and conferences, to learn more about investing in commercial real estate.
Form an LLC
When you first start commercial real estate investing, the best thing you can do is form an LLC. An LLC can serve many different purposes when starting your own investment company. For one, an LLC can shield your assets from creditors.
It can also shield your financial transactions, such as banks and the government, from prying eyes. An LLC also allows you to separate yourself from the business, making it harder for an adversary to determine who is responsible for certain decisions.
Set up your brokerage account
When you set up an LLC, you will need a brokerage account. This is where you will store your investment funds. The brokerage account you set up should be with a brokerage company, such as Charles Schwab, Fidelity, or TD Ameritrade.
You will also need to provide your LLC information, including the address of the LLC, the name of the LLC’s manager, and the brokerage account’s name and address.
Review properties to find your investment niche.
Once you have set up your brokerage account and have a few properties, you would like to invest in. It is time to do some research. It is important to know your target market before you begin looking at properties. What kind of properties are you looking for?
What kind of demographic are you targeting? Each market is different, and it is important to know what kind of property owners you are looking for. For example, if you are looking to invest in office properties, you might want to look in areas with a high population of businesses, such as big cities.
If you are investing in retail properties, it is important to look at demographic trends, such as the growth in the number of people in your demographic.
Negotiate the best lease deal
Before you sign any lease deals, knowing what you are getting yourself into is important. Read all the terms and conditions of every lease deal you are considering. This can be difficult, as you would like to ensure that you get the best deal possible, but at the same time, you want to make sure that you do not sign a lease deal that is too risky.
Think about your goals and how they deal affect your goals. For example, is the deal large enough to make a profit? Does the lease have a decent enough term? These are all things that need to be considered when signing a lease deal.
Protect your investment with syndication and securitization protections
There are many ways that you can protect your investment with commercial real estate investing. One way is by using mortgage-backed security. This is a type of security that allows investors to buy shares of mortgage-backed security (MBS).
MBS are bonds that are backed by mortgages. Investors purchase MBS shares backed by mortgages, meaning they are guaranteed to be repaid. There are a few ways that an investor can protect this deal. First, the investor can choose to buy high-quality security.
Second, the investor can buy a deal backed by a government agency, such as the Federal Housing Administration. If you are investing in commercial real estate, you want to make sure that you are making a safe and secure investment and protecting your investment from rising interest rates.
You need to firstly socialize, network, or meet with the people who work in the industry, such as commercial real estate brokers, developers, bankers, syndicators, attorneys, etc., because one of these people may introduce you to the people who could help you get into the business.
Besides, once you secure a job or position in the commercial real estate business, you will have a long list of contacts that would make it easier for you to excel and progress in your career. You can always reach out to the relevant people in the following ways:
- Become an assistant and work with them
- Reach out via emails or letters
- Schedule a personal meeting
Prove your credibility
It takes a couple of meetings, as many as 50, for you to win someone’s confidence. So be persistent and try to prove your credibility by indiscreetly proving your capabilities over meetings, dinners, or cups of coffee.
Pay the bills
Paying for the bills and things here and there renders a good impression, so it’s another important aspect of the whole process.
Make sure to send a thank-you email or show gratitude after the meeting, and do not forget to follow up via calls or emails.
What factors to Consider before Investing in Commercial Real Estate
Investing in real estate or commercial property is not an easy job, even if you have experience in residential property buying and selling because commercial properties are divided into many categories, e.g., Office, Retail, industrial, land, and even mixed-use, these categories have sub-categories.
This is what makes the commercial property network a lot more intricate. Before diving straight into the investment world, you should look out and consider many factors:
Getting your finances in order
We are familiar with the quote “Haste makes waste.” Thus, one should never hurry into the investment business. First, order your finances; how much money do you have?
How much loss can you afford? No doubt, financing can be a little complex; therefore, you should fully figure out your money expenditures. If you intend to take a loan from lending institutions or banks, you should satisfy all your relevant queries about interest, etc.
Different property types
Not all commercial properties are the same. As mentioned above, there are vast categories of commercial real estate. All properties differ in supply, demand, value, and profit. Some properties perform better than others depending upon the demand and environment of the neighbourhood.
Location of the property
One of the biggest factors you must look out for when investing. Location and demand should meet the type of property you are going for. For example, offices would do better in CBD areas.
Understanding the commercial property market driver
Every market has some driving factors, and demand is this market’s most essential driver! But this demand is further dependent upon many socio-economic factors a growing and productive economy offer less risk and more profit than a weak economy.
As the economy grows, the old commercial markets are overtaken by new national or international markets. One market boosts another, and ultimately the demand for almost all types of commercial real estate increase
Interest rates, infrastructure development, and population growth are important factors in a region where you intend to make an investment breakthrough.
Pros and Cons of Investing in a Commercial Real Estate Market
There are always two sides to the coin. There are always cons with pros. As much as commercial real estate is beneficial, it can also pose a lot of disadvantages to the investor. The following table lists some of the important and commonest pros and cons of the investment in commercial market:
|Long term lease||Higher periods of vacancy|
|Stable investment||Reduced capital growth|
|Relatively constant cash flow||Economic factors can change demand|
|Lesser competition||The property value can decline sharply|
What are some common mistakes people make when investing in the commercial market?
When doing something new, you ought to make mistakes then and there. Humans making mistakes is something inevitable. But, it’s not impossible to avoid these blunders. The real estate commercial market is a risky place to make common errors because it can cause quite a hurt to your pocket, and you may fall into a financial liability.
So to avoid making these mistakes, you must know them before. Here are some common mistakes people make when investing:
As mentioned above, commercial deals are different from residential ones. They are more intricate and complicated. As much as the property is costly, there can also be a long vacancy period; therefore, you may need some additional income sources to purchase an investment property.
Failing Due diligence:
You should never neglect adequate due diligence on the property. It is always advised to perform thorough due diligence, whether it is the physical condition of the property or financial due diligence. Today’s market requires fast and decisive decisions, which can tempt people to avoid this important job.
Only focusing on ROI:
Some investors fail in the commercial market because they focus only on Return on Investment (ROI). Well, it’s not a bad thing to focus on return, but ignoring account recurring cash flow and potential appreciation in property value is a problem.
Lack of planning and knowledge
People who have suffered in the Commercial market often say that the common blunder they made was going into the business without a proper plan and research. It’s very important to pre-plan all the backups and detailed research on the neighbourhood of the asset location.
No involvement of experts
Most people go with the mindset that “I can do it alone.” Chances are you may suffer a lot if you do not involve some experienced experts in the field. Commercial real estate brokers have a lot of experience and can help you navigate the market. This can save your time and efforts.
Selecting the wrong property
Even a genius mind can sometimes make basic mistakes. Since selecting the right type of property is one of the most important factors, always look out for the current demand and geographical factors.
Best Tips to be Successful in Commercial Real Estate
Investing in commercial real estate is still one of THE best options for building wealth. Why? Because even if you lose money in a deal, you can end up with more equity than you started with, which counts when it comes to passive income. Here are some of the tips that can boost your investment business:
- Make sure you’re familiar with commercial real estate loans and any fees associated with them before purchasing your first investment property.
- If it’s your goal to own income-producing properties, then you should also know what tenants are looking for in their lease.
- Before you buy, you should ensure that what you’re buying is in good condition and that it’s worth what you’re paying.
- You need to know what kind of property you’re looking at before making your offer. This depends entirely on how much money you have available and how long you plan on holding onto it,
- Commercial properties have low capital growth, so you need a high cash flow rate.
- Tenants pay all outgoings.
- Online forums are one of the best ways to learn more and be updated about the market.
Frequently Asked Questions
What is due diligence?
Due diligence, in simple terms, is the thorough investigation of the property by the buyer before buying it. The due diligence involves financial investigation and checking the physical state of the property, whether it is in good condition or not.
How do you define cash flow?
Cash flow is the amount of money generated or consumed at a particular time.
Who is a real estate agent?
Real estate agents are professional and experienced people who are well aware of the market trends and all the ongoing demands and properties.
Sheena Whitlock, a property expert, and blogger with over 15 years of experience in the field. The knowledge and skills Sheena has acquired during her career have given her invaluable insight into the property management business.
She has done her Property Development BSc (Hons) from the University of Portsmouth and completed her Master’s Degrees in Property Management from the University of Chicago.
As a professional, she has spent time working for various companies as a property management officer and currently works at Asset Info Hub where she shares her knowledge and experience on various property matters with people around the world, questioning their queries via blogging and virtual consulting services.