One of the assets that can glorify your portfolio to a new level is by getting the right commercial real estate investment. You need to consider a lot of important factors in order to evaluate the viability of commercial real estate investments. Investors should really consider this type of investment as a crucial exit strategy. The fact that such investment represents a great way to gain wealth makes it advantageous over residential investments. It offers higher income potential, steady cash flow, more attractive leasing contracts and lower vacancy risks. However, you must also be aware of the obstacles that would come along your way when investing. These undertakings, on the other hand, are completely avoidable if you get to understand the twist and turns of how the deals work.
Real estate investors in Bay Area California should know that commercial investments rely mainly on purchased properties that are being used solely for business purposes. The space could also be leased in order to collect rent from the businesses that occupy the rented space. You may know these properties as retail, industrial and apartment buildings, warehouses, and office.
Investing in commercial real estate, more so succeeding in it, requires following these steps:
1. Think like a professional.
In order to succeed in commercial real estate, you need to learn what the insiders know. You have to act and think like a professional, and see the investing world in that perspective. There are important things that you need to be aware of in order to have a greater chance of succeeding. You need to know the difference in value when it comes to commercial real estate and residential property, and in what ways you’ll get greater cash flow. If you’re in a tight financial environment, there’s still a way for you to invest in real estate even with bad credit. However, lenders would prefer for you to show some money before giving you a green light for the loan.
2. Plan everything beforehand.
A wise man will never go to battle unprepared. Likewise, a wise real estate investor like you should never engage in any deals without knowing first what you’re up against. The top priority when it comes to landing the perfect commercial real estate deal is to set parameters. You have to be aware of how much you can afford to pay and take a look around for mortgages so you will be able to estimate how much you will pay over the life of the mortgage. You can ask a mortgage broker to help you understand more of these things.
3. Know a good deal when you see one.
Not all opportunities that present themselves to you are good and eventful. You need to learn how to recognize a good deal so you won’t fall into the bottomless pit of despair and regret. Always know that the best deals are those that you know you will be able to walk away from. An exit strategy is a must in order to know a good deal. As a commercial real estate investor, you must have a sharp eye to notice damages that needs to be repaired and the risks that you need to assess in order to ensure that the property you land meets your financial goals and expectations. If it’s your first time financing your real estate investment, you must know the dos and don’ts in order to survive.
4. Be adaptable when searching for great deals.
You can use a three-pronged approach in this case to evaluate properties. One way to evaluate a commercial property is to study the neighborhood where it is located by going to open houses, talking to other owners, and looking for vacancies. This is what investors call the fine art of neighborhood “farming.” Another way of searching for great properties is through the internet, classified ads, or hiring a bird dog to help you in finding investment leads.
5. Acknowledge local market conditions.
It’s very important that you are aware of the local market conditions. In order for you to do that, you need the market and the property in order to evaluate a real estate investment. Out of these two levels of due diligence, local market conditions weighs more. Remember that a great property placed in a bad market is a disaster. A poor property in a great market can be an oasis in the middle of a desert. You need to analyze the demographic trends of population growth, income, and employment in the local market in order to know where the opportunity lies, and where it doesn’t. These areas will decide whether or not your investment will succeed.
6. Have adequate knowledge on due diligence.
Investing in something you don’t fully understand is like walking in a dark room without a light. You might fall a couple of times and it will be quite difficult to stand back up. The second level of due diligence is the property condition. This includes physical items like building systems, structural components, and environmental matters. However, intangible matters such as title, survey, and zoning and land-use regulations are equally important. You also have to know about contract law, insurance, finance, accounting, and tax law in order to do things right and avoid entanglements halfway through the investment. It’s important to ask help from professionals if you’ve never dealt with such matters before. Paying for professional to do the job is cheaper than paying for the loss that you might experience in the end.
7. Do the math.
Commercial real estate investing sure isn’t rocket science, but it definitely deals with numbers you have to solve. There are calculations that you must do and operate that’s why it’s crucial that you get the real operating numbers and not just the projection of potential gross income and estimated expenses. You also have to consider the risk that increases for every assumption that you make. Never think that you can save expenses by cutting corners, like raising the rents after you possess the property. You need to make the numbers work in order to gain numbers.
8. Have enough leverage.
In the world of real estate investing, highly leveraged deals occur but it can be disastrous when it is not backed up by a solid plan partnered with a sufficient capital. You have to know that borrowing too much money in this business can be devastating. Unless you want to know how to become a private money investor, you need to make use of leverage properly. This is a function of deal structure and investment strategy, knowing that every commercial investment property must be evaluated in the light of the break-even ratio. Calculating the break-even ratio helps you in determining if you’re walking through a dangerous territory or not.
9. Prepare multiple exit strategies.
Having prepared a lot of safety nets in case you wall will make you numb of the impact. You won’t ever feel the damage of landing from the fall. You need to have a realistic plan that will maximize the value of the property in the shortest time possible with the least possible downside. Having more than three exit strategies can get you out of the danger zone after a terrible fall. You need to learn how to get your money out of a deal when necessary so you won’t run out of money.
Success, as they say, is a flight of stairs, not an elevator. You need to go through certain stages in order to learn and grow and finally ace your commercial real estate investment. There might be difficulties and a bit of bumps along the road, but know that the land of milk and honey awaits you. These steps are but your guide in succeeding. The most effective step is your determination and drive to really succeed. The first step is always the most difficult part, but as you go along the process, you’ll realize it gets easier.