Commercial real estate investing provides a tremendous opportunity for long-term growth and wealth. However, the more considerable the investment, the greater the risk it is. Therefore, it’s essential to consider all of your options and understand exactly what you are doing before investing money. Here are five tips for commercial real estate investing.
1. Follow the market carefully.
Know the market before investing. Pay attention to property values, what’s selling, what investment opportunities there are, and where the community is heading. While things can happen that you weren’t prepared for, the more in tune you are with the area, the more prepared you will be for changes and new developments. If you are still considering where to buy an investment property, research what areas are growing and on the verge of rapid expansion. Getting on the front end of a community expansion will allow you to profit significantly from a potentially small investment. While there is always a risk with investing, the more you know about the market, the better your chances will be profiting.
2. Research the real costs of the investment.
Be realistic when accessing the cost of investment and potential profits. You need to make repairs and take maintenance into consideration. It would help if you also took factors like the area, the market, and the weather into consideration. For example, if you are in an area prone to hail storms or tornados, are you prepared for roofing hail damage, tree damage, or other severe property damage? Understand the types of insurance riders and protections you need to take into consideration. In addition to potential storm or hail damage, you need to look at if the property is in a flood plain.
When investing the real costs, closely examine the property damage that already exists. Get estimates on what it will take to make the property rent-ready. It would help if you also looked at the going rental rates in the area to determine how much you want to invest based on what you can get back on your investment.
3. Learn From Others
While reading and learning about the commercial real estate market is critical to success; learning from others in the business is invaluable. There are conferences, networking events, classes, seminars, and Ted Talks that will allow you to learn from, connect to, and network with many successful people in various aspects of commercial investing. For example, Alastair Barnes is an analyst with JLL Capital Markets and recently helped to secure $26.65 million in financing to develop a mixed-use commercial property in Austin, Texas. While he is not personally investing in commercial real estate, he is extensively familiar with the financial side of the industry. Reading up on him and what he has accomplished can provide insight into how the funding of large commercial investments can happen in different ways.
4. Be prepared for the unexpected.
Commercial real estate investing can be full of surprises. Unfortunately, those surprises can turn your great opportunity into a money pit. To get the most out of your investment and thrive in your new business venture, it is vital to plan for the unexpected. Always have funds set aside for emergency repairs, problems, or vacancies. It is recommended to have 5% to 10% of the total project budget set aside for unexpected problems, repairs, or costs.
5. Have an exit plan.
When you buy a property, you should already have an exit plan. For example, are you planning to renovate and sell? Are you planning to keep it as a long-term rental? Are you working with a partner or group of partners? Your exit plan will partially determine the amount of time, effort, and money you put into the renovations. For example, if you plan to flip the property, the goal is to spend as little as possible. If you are planning to keep it as a long-term investment, you want to focus on the quality of the renovations to ensure you get your investment out of the project.