Thinking About Investing in Commercial Real Estate? Here’s What You Need to Know
Real estate’s commercial aspect may be an attractive proposition for an investor. It’ll offer you the capability of dipping inside a new client pool and expand your business.
However, the commercial aspect of it also is a whole different beast which requires some extra considerations vs. the residential aspect of the business.
With these transactions, patience is critical, because the cycle of sales is longer and requires the investor to stay on top of marketplace demand. However, several signs point to CRE as a solid option for agents who want to move forward in the year 2018.
Most investors want to get into the realm of commercial real estate without really understanding the basics. You must educate yourself constantly on the fundamentals of analyzing commercial properties (I do not simply mean popping numbers inside an Excel spreadsheet), even if they’re properties you aren’t in a position to buy. You must have the ability to assess a deal with nothing more than a piece of paper and a pen if necessary.
Often, new investors merely pop numbers inside a spreadsheet with a pre-determined formula and get all the details that are important to a deal; however, do they really understand the details they’re receiving? Could you crunch the number on a deal of a lifetime if you had nothing more than a piece of paper and pen?
You may be surprised to know that most folks can’t crunch the numbers; however, you better be certain that you can. With that said, I thought it would be important to talk about those things any new commercial investor should understand.
1. Remember That Everything Will Take Longer
As compared with a residential investment, everything takes much longer. Paying your due diligence consists of months rather than days. Locating new renters takes much longer. Renovation or build out takes longer. However, leases are also longer. Patience is critical. It’ll just take a little longer.
Have an Understanding of the Marketplace
Investors must understand the marketplace they’re investing in. Having an excellent understanding of the basics (rents, vacancy, competition, legal implications, etc.) will permit investors to make educated investments which would yield high returns. It’ll allow investors to fine tune all investments, as well as portfolio diversification.
2. Consider Trends and Area Demographics
While investing in CRE, an investor must consider trends and demographics for the area. Do those play into the purpose for making an investment? Do you have plans to develop? If they do, locate a broker in the area who knows the area and understands the playbook of the authoritative agencies in the area. Here, you’ll have to know environmental law and civil engineering.
3. Evaluate Risk by Type of Property
Risk assessment is different in CRE, compared with residential, and greatly varies by type of property. The success of residential properties in close proximity to each other is usually similar, whereas commercial structures that are in a likewise position might independently fluctuate; therefore, it is vital that you know the variety of risks that are inherent to a possible investment.
4. Avoid Business Models or Failing Businesses
If the tenants include grocery stores, restaurants, business models, or bars which are migrating on the internet (such as banks), you must assume that they’ll default upon their lease during some point, and you must correctly prepare your insurance to ensure that you’re covered if that happens. Look for failing businesses and try your best not to deal with those types of businesses because there might not always be a parachute.
5. Understand the Time Frame for City Approvals
After you work with different jurisdictions for the permit approvals by the city, I realize it might take a month or even a couple of years before you receive a permit for the building. Before you purchase a commercial property, arrange to meet with the authorities in your locality to discover the necessary approvals — from zoning and planning, city council, site plan, and so on.
6. Know the Market Trends’ Impact Upon Demand
It is vital that you know the dynamics of the type of property you’re choosing. For instance, if you want to invest in retail, think about the long- and short-run impacts of e-commerce upon consumer and tenant demand. If you’re browsing offices, give consideration to how trends such as telecommuting and co-working would impact demand for office space within your market.
7. Be Prepared to Play a Very Active Part
Commercial real estate investment isn’t a passive investment. The best investors play an extremely active part. They have processes and systems in place to make sure that the property is accomplishing its maximum running potential. They constantly are keeping up with economic and development trends in the local marketplace, as well as broader trends in the economy.
8. Find a Good Deal or Capital
In order to be a success in commercial real estate you have to have two things: a deal or capital. Presently, the market is flush with capital and if it’s possible to locate an appealing deal, the equity is going to be there for you. If you do not have a deal and are concerned with high valuations, locating a patient capital source ought to be your main priority. Lining them up will provide you the credibility needed to be a success.
9. Consider Commercial Real Estate Debt
Some investors are not aware that there’s a chance to invest in real estate with less risk and higher possible return than property ownership – via commercial real estate investment debt. The range of returns is within 8 – 10 percent. It can also have a stronger standing than what property owners expect in case of a market correction. This chance is often overlooked by the ones who want to dive into commercial real estate investing.
10. Do You Have an Understanding of the Story the Numbers are Telling You?
If you’re serious about getting into commercial real estate, you have to understand, know, and internalize the above concepts, without exception!
For more questions about investing in commercial real estate contact Kaufman Construction & Development today!