Real estate is typically a great investment. Properties increase in value over time, someone else pays the mortgage and you acquire an asset that provides an income and can be used as leverage. However, successful commercial real estate investors find even better deals than residential real estate investors. If you hope to invest in commercial properties, consider these tips.
Create an Investment Plan
Your first task should be setting your investment goals. For example, what type of commercial property do you want to invest in first? When do you want to make your first investment? What are you looking for in a great deal? Set your budget and calculate the mortgage rate you prefer. Estimate your expected earnings. Also, identify the location you hope to invest in. After you have detailed your first purchase, expand your plan to include future investment goals.
Your strategies for investing in commercial property will differ significantly from your residential real estate strategies. For example, square footage typically determines your earning potential. In addition, your cash flow will be greater without expanded paperwork or extensive legal challenges. However, you will need to have better credit and a larger down payment, typically at least 30%, in commercial transactions.
Next, learn about what makes a good deal. In addition, create an exit strategy if a deal isn’t as great as you initially thought. Find out how to see a property through an investor’s eye, searching for necessary repairs and defects as well as earning potential. Then, study the metrics that determine whether a property will make a good investment, such as net operating income and capitalization rate.
Search for the Right Sellers
The best deals are below-market value. Therefore, you should search for sellers who are highly motivated to sell their properties. To find these properties, you should search through local internet and classified ads, but you should also develop relationships with local real estate agents and brokers. Don’t hesitate to use digital tools as well. You may also consider hiring someone to find below-market properties. These “bird dogs” typically work for a small referral fee.
Just like residential property, commercial property values are largely based on the neighborhood they are in. Therefore, you should always carefully evaluate the neighborhoods of any property you hope to invest in. One way to do this is to visit open houses in the area. You should also analyze the local businesses and their longevity. Evaluate lease lengths and occupancy rates as well.
Commercial real estate can present a great investment opportunity if you create a plan, learn about the industry, find motivated sellers and do thorough investigations of the properties and neighborhoods.