Commercial Property Investment Tips for Beginners
Commercial real estate includes multi-unit, mixed-use, office, retail, manufacturing and warehouse-type properties. These tend to be much larger investments than residential real estate, but their benefits can far outweigh other investment opportunities. However, investing in any real estate project has risks. Therefore, these are a few tips to help you mitigate these risks and choose the right property investment.
Review Your Investment Goals
Your first task should be reviewing your investment goals. Determine the type and number of properties you want to purchase during the short and long term. Also, evaluate your current budget as well as your expected income and return on investment. This includes specific financials, such as your monthly cash flow. Consider the renovations or value you are willing to add to the property, including deferred maintenance and external improvements. How long do you want to hold the property, and what type of appreciation are you looking for?
Build a Strong Team
It is especially vital at the beginning of your investment journey that you find a solid team. Consider starting with a mentor who has been successful in these types of investments for a number of years. Choose someone who will let you shadow him or her through at least one, but preferably several, purchases and who will share his or her strategies for success with you.
You should also build relationships with a realtor, mortgage broker, tax accountant, real estate attorney, contractors and your local bank. You may add to your team as you go, but at least start with a reputable realtor and contractor.
Gain Financial Knowledge
Learn how to read a rental property proforma. Learn about your potential gross revenue and how it is impacted by vacancies. Check the property’s vacancy rate. Calculate operating expenses, including utilities, taxes, management fees and maintenance. Also, consider how much you have to pay on your debt service. Your operating income is calculated by subtracting your vacancy and operating expenses from your gross revenue. Learn about the rate of return and what factors impact it. Your CAP rate and Cash on Cash numbers should also be calculated.
Secure Your Financing
Remember that commercial real estate tends to be much more expensive than residential. Therefore, if you don’t have the money sitting in a bank, you may need to search for financing. You can consider traditional bank loans, but be prepared to meet stringent requirements. Alternate financing is also available, or you can work with partners or other investors. Before you sign any loan documents, consider the interest rate, loan term and amortization.
These are just a few tips for you as you start your commercial property investment journey.