Commercial real estate can be a great way to diversify your portfolio. It can also be more profitable than residential property investments.
However, it can be intimidating for new investors. Fortunately, there are ways to get started in commercial real estate without investing millions.
These strategies include crowdfunding and REITs. Learn more about these options in this article.
If you’re an investor with experience in residential real estate, you may be able to transition seamlessly into commercial property investing. The core concepts are similar, and you can use many of the systems that brought you success with residential properties. However, commercial real estate investments are typically more complex and require a deeper understanding of real estate finance, including complex formulas like net operating income (NOI).
There are two main ways that commercial real estate investors make money: by renting out the property to tenants and collecting rent as revenue; or by capturing appreciation of the property’s value over time. Investors can also choose between passive and active strategies, depending on their resources, knowledge, and objectives.
One popular way to invest in CRE is by developing raw land, converting it into a building and then selling it for a profit. Another is through buying and renovating existing buildings, which can be very profitable, especially if you purchase the property at a discount from the market. This strategy is called a “fix and flip.” Another approach is wholesaling, where you purchase a contract from a seller at below-market value and then sell it to a buyer.
A third way to invest in commercial property is by purchasing a triple-net lease. These leases eliminate landlord responsibilities, and they allow you to evaluate the value of a building based on its tenants’ business operations.
It takes a significant amount of capital to get started in commercial real estate investing. This is because CRE deals are usually larger than single-family properties and require a higher down payment. Nonetheless, there are a variety of financing options available to beginner investors. Whether it be a commercial loan or a crowdfunding platform, a new investor can leverage these resources to purchase a property.
Moreover, CRE investments offer investors both income and appreciation potential. Its a great option for investors who are looking to diversify their portfolios and add stability during times of market volatility. This is because the return on CRE investments have little correlation with broader equity markets.
Furthermore, CRE offers investors the opportunity to build business relationships with tenants and other businesses within the same industry. This is because tenants in commercial buildings typically sign longer lease agreements than those in residential properties.
Whether a new investor chooses to invest in direct commercial real estate or through a more passive vehicle such as REITs, crowdfunding or partnerships, they must remember that there are still risks associated with any investment. As such, it is important to have a long-term plan in place that allows investors to filter out deals that do not meet their goals and help them stay on track to reach their investment objectives.
3. Due Diligence
It’s easy for beginner investors to get so excited about a property that they overlook critical aspects of the investment. A thorough due diligence process will help avoid these mistakes.
The term “due diligence” was coined in the fifteenth century and originally meant a “requisite effort.” Over time, it has become a legal term that refers to research done before a financial transaction. It is also used in business contexts, where it describes the steps and processes that a company goes through to assess and monitor risks within its ecosystem.
In commercial real estate, due diligence involves researching and analyzing the physical, legal, and financial components of a property before making an offer. This research should include inspections, surveys, and title work. In addition, it should address the local market’s ability to support the proposed use of the property. It should also look at zoning laws and other regulatory requirements. Finally, it should explore the property’s history of ownership and maintenance.
A thorough due diligence process will help new investor avoid expensive mistakes. It’s important to make a list of what information is needed and prioritize that request. For example, a buyer may want to learn more about a seller’s tax records, but that information might not be as critical as learning how often the business buys new equipment.
Getting started in commercial real estate requires more capital and expertise than residential investments. However, there are investment options such as those offered by Fundrise that allow anyone to invest in a diversified portfolio of commercial properties.
In the commercial world, investors can build relationships with tenants in a more professional way than they might in residential. This can lead to higher rents and more cash flow for investors. Additionally, it is common for tenants in commercial buildings to sign leases that are longer than those in residential properties. This means that commercial investments can have an impressive return on investment over a long period of time.
Commercial property investments are often based on the concept of net operating income (NOI). NOI is calculated as all revenue generated by the property minus all operational costs including insurance, maintenance, management fees, utilities, repairs, and janitorial services. Investors that understand and utilize this calculation can maximize their profits on CRE investments.
While it may seem intimidating at first, beginner investors should realize that the core skills and systems they use in residential real estate can easily be transferred to commercial investing. The most important thing is that investors mind their due diligence and fully understand the financial complexities of the deal they are considering. The lack of this understanding can lead to financial ruin if the deal is not properly vetted and understood.