Tips for CRE Investing
Commercial real estate investing is a volatile market which is always changing. Remaining competitive is essential in the performance of every asset. Here are some tips that may help;
Investors with experience and knowhow will utilize financing to leverage their investment where it can essentially have higher return on investment, rather than purchasing with “all-cash”.
Do Not Over Leverage
Over leveraging can be a determinate to the investment process. Therefore shopping for the best loans available in the market is essential. In addition if the market turns negatively, your equity will shrink leaving you “no room to breath”. A higher down payment would typically resolve this concern.
Location is the Key
We all know the first rule in real estate – location. Do your research by visiting local open houses, events, and browse local listings. Look at the vacancy percentages and really get a feel for the neighborhood. Is a large company about to move in, or out? This could have a huge impact on your values. If you do not know the market of a particular area, chances are you also aren’t familiar with its rents, cap rate, and gross rate multiplier. Essentially you are on a sinking ship, with a captain who doesn’t know the destination.
Branch Out Cautiously
The jump from residential to apartment buildings is a logical next step because it is fairly similar in concept, but don’t be afraid to think about other types of properties. Mobile home parks, for example, are great investments during a recession; and vacant land in anticipation of urban growth can be purchased cheaply. Think about what best suits you, and go from there. However, if you are only familiar with apartments and you purchase an office building, you may not know the modified gross through the triple net in difficult leases. This is where you will find yourself in a bind.
Don’t Waste Time on Small Properties
Getting commercial financing is an inherently tough and hassle-filled process, so why bother with a small three unit apartment building? You (or somebody you hire) is already going to be managing the property regardless, make it worth your while! Go for 10-20 unit properties and maximize your time and investment. Also, the cost per unit goes down the more you purchase.
Don’t Put All Your Eggs in One Basket
Many people focus on one or two properties, which is then suddenly hit by an earthquake, retrofit problems, or other unforeseeable variable that leave you stuck with one piece of real estate without a backup. Also, don’t buy all of your buildings in one geographical area unless it has a AAA rating.
Don’t Get Discouraged
Residential real estate has a very systematic routine and flow to it – with tangible transaction dates on a calendar. Commercial is unpredictable and it can be difficult to even find an initial property worth investing in.
Commercial deals take much longer than residential. If you are trying to “flip” a commercial property, be prepared to wait. Purchasing, renovation and leasing all have longer time frames. In addition capital appreciation can take some time. The benefits of a 1031 tax deffered exchange is one of the best tax benefits our system has. To read more click here.
Ask The Experts
Don’t be afraid to ask for help when you are just starting out. There are many local investors and partners that often give seminars and classes, and this will help build your commercial real estate network!
Find Good Financing
You will initially need a higher percentage of the loan as a down payment, so be prepared to come up with more cash right off the bat. The good news, however, is that there is often little personal liability in commercial deals if they fall through. Also, it is easier to borrow from third parties. Do your research beforehand and find the best lender in your area!
Find Motivated Sellers
It is difficult to negotiate with a seller that doesn’t have an urgent reason to make a deal, so do your homework and find the ones that are. The more motivated the seller, the farther the deal dips below market value.