Anyone who wants to embark on a commercial real estate venture needs to be prepared. While there are many thousands of real estate investing opportunities and entrepreneurs making a lucrative living in the trade, it is essential to understand some basic “rules of the road,” to get acquainted with a handful of typical steps every commercial real estate investors takes, and to know the important advantages of real estate investing on a commercial level.
Advantages of Commercial Real Estate Investing
People go into commercial real estate for a variety of reasons. Here are the three most common ones:
Rents are higher: Investors who have been involved in commercial property rental and ownership for a long time often cite three key advantages of this type of investment. First, the rent amounts tend to be higher than for residential real estate. There are several reasons for this. Landlords typically offer much more service to commercial clients, the properties are usually located in higher-rent locations, and renters are able to pay higher rents due to their higher income levels compared to residential renters.
Property values go up significantly: Compared to residential real estate, commercial properties tend to increase in value over time, sometimes to a very great degree. In fact, it is common for owner/investors to charge rents that cover all costs associated with day-to-day operations. That way, when it comes time to sell the property, owners can reap huge rewards due to the increased property values.
Extended lease terms: Commercial leases are often written for multiple numbers of years, rather than the typical one-year lease arrangements on residential property. This gives owners peace of mind and guaranteed cash flow for longer periods of time, and that translates into financial stability.
There are other advantages of owning or investing in commercial property, but the three items mentioned above account for the primary factors that investors are attracted to commercial property as a way to make large profit margins for extended periods of time.
How to Get Started
It’s easy to fall into some common traps as a first-time commercial real estate investor. Here are some things you can do to avoid the most prevalent hazards of this kind of investing:
Know the trends: The market is changing all the time, which means you need to stay on top of current price trends, business practices and changes in local laws.
Be patient: Successful investing requires patience. High profits won’t materialize overnight, so keep a damper on the enthusiasm to make high returns in a short period of time.
Have a plan: Before embarking on your investment journey, have a written plan for the type of real estate you intend to acquire, how you will purchase it, and how you want to go about maintaining it on a daily basis.
Budget like a pro: Budgeting is a subset of planning, but is the most important part of the puzzle. Without a strictly thought-out budget, all the rest of your planning could come to nothing. Remember to be realistic about budgeting, keeping in mind the limits of your monthly and annual financial strength, and noting exactly how much you’ll be able to commit to the venture.
Know your risk tolerance: Every investor should take a long, personal look at their own risk tolerance level. If you can’t handle much risk, consider starting very small with commercial real estate. You’ll find your way with this aspect of the enterprise, so constantly re-evaluate your risk tolerance every few months.
Keep detailed records: Record-keeping serves multiple purposes. Not only will you want to have detailed records for tax reasons, but these documents will come in handy as you begin to compare one period’s profits against another.
Obtain pre-approved financing: Speak with your banker or lender and see what level of financing you can get pre-approved for. This is actually a part of the budgeting process, but it helps immeasurably to know how much funding is available to you from the very beginning.
Know your long- and short-term goals: Have two sets of goals for your real estate investing: long- and short-term. Write down your specific goals for three, six, and 12 months from the beginning of the investment program. Then make a 3, 5, and 7-year plan to get an idea of where you want to go in the long-haul.
As with any other type of business venture, there is no “magic bullet” for success. Fortunately, there are some very specific steps you can take to maximize your chances for success in the exciting, challenging, and extremely rewarding world of commercial real estate.
Four Areas for Self-Education and Research
There are dozens of areas in the field of commercial real estate where investors can spend time absorbing information that will help them succeed. Here are three of the most important ones:
Understand the financing arrangements of commercial real estate: This will take some self-study time and calls for research. Due diligence is a requirement for successful investing of all types.
Study the market you’ll be investing in: Know the geographic region’s trends, history and market profile before investing.
Understand the unique aspects of commercial real estate: Learn how commercial real estate differs from residential, and get acquainted with the terminology of the trade.
When your money is on the line, there is no excuse for not boning up on the finer points of commercial real estate. Find several good books on the subject and study them thoroughly. Try to locate a mentor who has experience in the field. A good mentor can be a huge factor in your long-term success. Finally, set aside a few hours each week to do online research in the subject area. The learning curve for commercial real estate investing is not threateningly steep, but this area of the business world does call for continuing education on the part of every successful investor.
There is plenty of profit to be made in the world of commercial real estate investing, provided you go about the process in a logical, calculated way. Perhaps the most common pitfall for new investors is not being prepared, not doing enough “homework,” and not understanding the essential elements that go into a successful commercial real estate investment.
Starting out slowly, taking time to learn the ropes, and not expecting to be wildly successful overnight are three of the key attributes of those who end up with long-term success as commercial real estate investors.