Commercial Real Estate investing is a great way to diversify your investment portfolio, but it is important to go in with the proper knowledge and attitude. Before deciding if commercial real estate investing is right for you, consider a few things. Today, we’ll cover some of the essential things to learn about how to start investing in commercial real estate.
First, you must choose which way to invest in commercial real estate. Direct or indirect investments are two primary ways to get involved in this type of investing. When you make a direct investment, you buy a building personally or via an entity such as a partnership or real estate LLC. This method requires that you have plenty of capital upfront and a fair amount of knowledge about the market and the process of investing.
Direct real estate investment is an attractive option for individual investors who want high flexibility and control. Direct investment benefits include choosing the exact property to run, including location, size, needed renovations, and upgrades.
The decisions related to daily property management, such as maintenance, tenant selection, and rent collection, remain firmly in the owner’s hands. Additionally, several tax benefits are associated with direct real estate investments, including deductions for maintenance costs, depreciation of the property value, and capital gains upon sale.
On the downside, direct real estate investing is not a passive income venture like traditional investments such as stocks and mutual funds. It often requires a lot of work upfront, from researching and selecting properties to managing them once purchased. That said, proper due diligence before making a purchase can reduce the risk associated with this type of investment; as long as the right research is done during the acquisition process, investors can enjoy stability and financial benefits from their direct real estate investments that go far beyond their initial return on investment.
Investing in real estate can be a great way to build wealth, but it also requires large amounts of cash upfront. Indirect real estate investment offers an alternative method for those looking to get involved in the market without tying up large sums of money. Often, through REITs or crowdfunding companies, investors can start with much smaller amounts of money while gaining exposure to diverse portfolios that span several different types of real estate investments. Another benefit is that these investments are liquid and easily accessed as you buy and sell them on the stock market or dedicated platforms.
Nevertheless, indirect real estate investments include some downsides. For one, investors cannot directly control their specific asset allocations – often using a predetermined management strategy instead. Also, these investments tend to offer lower returns than direct ownership investments due to the fees associated with managing and investing the funds, plus any profits shared not just among the stockholders but also individual contributors when using crowdfunding platforms.
If you choose direct investing, you must decide which property type to buy. There are many variables to consider, such as the types of properties needed in the area and whether the land is zoned for your plans. There are often many investment opportunities available. However, not every property is equal. For example, commercial apartment buildings require more hands-on management than retail centers or storage facilities. You may need to create room in your budget for a property manager.
Commercial loans work differently than residential property investments. It is vital to consider whether or not the potential properties you’re viewing will fit your current financial goals and needs before investing in them. Before taking any action, you’ll want to do your due diligence, such as examining the availability of capital sources, learning how to analyze cash flows and market trends, understanding real estate laws, and surveying potential tax benefits.
The exact terms of a commercial real estate loan depend on the specific type of loan, lender, property financed, and more. Common commercial real estate loans include a permanent loan, Small Business Administration (SBA) loan, hard money loan, and bridge loan. Part of determining the amount of commercial financing you receive includes future operating expenses, potential tenants, and investment plans.
Cash flow is a financial tool that is important to understand when planning for future investments and resources. It involves understanding your short-term and long-term objectives and having an unbiased view of what will best meet those expectations. Before investing in a property or other investments, it is essential to consider the type of cash flow associated with them. This includes assessing the amount of money expected to come into the process versus how much will go out in terms of expenses such as taxes, insurance, etc.
A good cash flow strategy is obtained by analyzing various elements surrounding the investment before making any decisions. This includes understanding the risks associated with each asset—is it a lower monthly cash flow but has other benefits involved? Will a higher monthly cash flow mean that there are more risks involved? Asking these questions helps identify which properties have more significant potential for higher investment returns. Once you identify your goals and expectations, you can assess each opportunity with an unbiased view and make decisions accordingly. With adequate research and analysis, a good cash flow strategy can help maximize investment returns while minimizing losses.
Value-added properties can offer a unique opportunity for investors to increase their rental income or rent out the property in its current state. These investments come with varying levels of needed repairs or renovations ranging from minor touch-ups and fixing existing problems to more major projects such as structural repairs and extensive redesigns. To identify Value Add Properties, investors must recognize signs like poor curb appeal, deferred maintenance, ineffective floor plans that prevent tenants from renting them out quickly, and an outdated aesthetic.
Ultimately, there is no one-size-fits-all formula for what qualifies a property as “Value Add,” but identifying these criteria gives potential investors the information they need to make informed decisions when adding a Value Add investment property to their portfolio. Value-added investments require strategic planning on behalf of the investor to maximize potential returns over each rental period — careful consideration should be taken into account when deciding whether or not an investment opportunity has any added value.
Triple net leases and retail financing agreements are great ways for businesses to finance their growth without taking too much risk. Regarding such agreements, the lease term is examined first to determine the amortization and loan periods accordingly. The down payment requirement is usually between 25-35%, and the interest rate should be lower than other forms of credit. However, the interest rate could change if the tenant renews the lease, potentially becoming higher than the average five to six percent offered initially. Companies must consider this type of financing and prepare for slight changes in cost over their specified terms.
Retailers may also benefit from bank refinancing when renewing their leases. This opens more flexible terms for tenants if they require more money or different rates upon renewal. Banks must ensure they offer a fair sum of interest while considering possible market conditions at the time of renewal, with rates typically lower than standard lending products, such as credit cards or personal lines of credit. With knowledge of triple net lease and retail finance agreements, entrepreneurs can more easily understand how to secure adequate capital without putting too much strain on their budget.
After choosing the location for your future investment, you’ll need to analyze comparables to ensure you look at similar properties with prices competitive to the current market value. When you work with a broker who lives and works where you’re looking to invest, you will remain confident that you have the most accurate information about the community’s needs and preferences.
A local broker will help you:
Understand the market area and supply and demand
Understand market cycles
Do thorough due diligence
When considering commercial property investment, due diligence is vital. Get familiar with the market trends of the area where the property is located and any particular features or drawbacks that could hamper its potential value. This is why it’s always best to work with a local real estate broker to steer you to the best properties for your investment goals.
At Ullian Realty, located in Melbourne, FL, we regularly work with first-time commercial property investors. We’ll help you determine the best commercial property for your investment goals. With over 60 years of combined experience, our team of brokers is ready to help today. Give us a call to learn more.
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