For investors looking to make a great return, there are few better choices than real estate, and commercial real estate in particular. But unlike just throwing some money into a mutual fund or even owning a residential rental, commercial real estate often requires some real work and knowledge that can be a bit challenging for beginners. That’s why we’ve rounded up these five tips that should help even new commercial real estate investors find success.
Why Invest in Commercial Real Estate?
There’s a lot to like about commercial real estate and real estate in general. All rental properties, whether they’re residential, commercial, industrial, or a mix, offer benefits like property appreciation (the added value as your property grows in price over time), cash flow from rental income, and the slow, steady equity gains as you pay down the loan with tenants’ money. There are also valuable tax benefits that come with owning real estate.
Commercial real estate offers unique benefits of its own. These include the potential for long-term tenants rather than people moving in and out every year or two, as well as fewer responsibilities as a landlord with “triple-net” leases, which place all responsibilities for insurance, taxes, and maintenance on the tenant instead of the owner. In addition, commercial properties can be updated and repurposed for a variety of uses, allowing owners to adapt to changing market demands.
Five Tips For Success In Commercial Real Estate
While it’s an excellent choice for many investors, it can be difficult to make the most of commercial real estate without a little guidance. Follow these five tips to make life a lot easier and more profitable.
1. Know Your Financing Options
Financing commercial real estate isn’t as simple as heading to your neighborhood bank and getting a neat-and-tidy 30-year, fixed-rate mortgage. While our personal homes and residential rentals are financed based on market value, commercial properties are often looked at in terms of how much income they can generate.
Terms are usually shorter, and rates are more variable, like with the popular 5/1 ARM loan. These lock in rates for five years before allowing lenders to adjust the rate once annually. Commercial properties may take more research to find the best places to borrow from, but they also offer a flexibility that’s valuable to many investors.
2. Focus On Deal Flow When Starting Out
The unfortunate truth about real estate investing is that most potential properties or deals that cross your plate aren’t worth pursuing, whether it’s not the right property, the right returns, or the right time. That’s why it’s critical to work on establishing a deal flow to get as many potential options in front of you as possible.
This can be accomplished through networking, direct marketing like targeted mailers, and a variety of other ways of finding properties that may not even be on the market. The more choices you have, the more likely you are to find that home-run commercial real estate investment.
3. Think Outside The Box
Often, a good deal is passed over by dozens of investors because they can’t see the potential for something different. Try to look at each opportunity with fresh eyes rather than forcing it into a box. With a small investment, you may be able to transform a struggling commercial property into a new type of business that thrives.
4. Find A Good Property Manager
If your lease terms require you to conduct maintenance, you have a multi-unit property with common areas, or you simply want the most passive income possible, a property manager is an excellent choice. They’ll handle tenant issues and maintenance, do your bookkeeping, collect rent, negotiate leases, and vet potential tenants.
This means your only involvement will be making big, higher-level decisions about the property and collecting your income. Naturally, property managers will add an expense to the property, but many find it worth it to avoid the hassle.
5. Find Good Tenants — And Keep Them Happy
At the end of the day, there’s nothing more critical to successful commercial real estate investing than a good tenant. Good tenants are strong businesses with good reputations for financial stability. Ideally, they’ll take good care of your property and require little help from you on a regular basis. Over time, you’ll hopefully develop a good relationship that can pay dividends in a variety of ways, so always try to think long-term when making decisions. Ensure you or your broker/property manager carefully vets potential tenants to find ones that fit this mold.
Commercial Real Estate Deal Are Waiting For Savvy Investors
Don’t let a lack of knowledge of commercial real estate scare you away from some excellent returns. With basic real estate experience and these five core principles, you’ve got a great start on finding success in commercial real estate. The best part? The sky’s the limit for creative, dedicated, and intelligent commercial real estate investors like you.