There are great advantages to investing in commercial real estate, to reap those benefits, it is essential that you understand the ins and outs of the commercial property investment industry, here is a step by step guide to get you started.
Education is the key to being successful in the commercial property investment industry. There are some unscrupulous dealers out there and if you don’t know your way around the market your funds will quickly get swallowed up in the wrong investments. Here are some of the things that you should know:
- The way commercial property is valued is different to residential property.
- The income generated from commercial real estate is tied in to useable square footage.
- Commercial property generates a larger cash flow because the leases are longer than on residential properties.
- You will need more money to invest in a commercial property. Lenders prefer to see that you have at least a 30% deposit.
Have a Strategy
How will you know where you are going if you don’t have a plan? Before you start making investments have a set goal in mind and a plan of action detailing how you intend to reach your goals. Questions you should ask yourself include:
- How much money do you have to invest?
- How much are you willing to pay over the life cycle of the mortgage?
- How much profit are you expecting to make?
How to Recognize a Good Deal
One of the traits of a good investor is that they know a profitable deal when they see one. It helps if you have landowner’s vision where you can accurately assess the following:
- The damage to a property and the repairs required
- Accurate risk assessment
- Whether or not the property lines up with your financial goals
Understanding Key Metrics
There are several key metrics you will need to understand when evaluating commercial real estate, here are some of them:
- Cap Rate: This is how the value of income producing properties are calculated.
- Net Operating Income: This figure is calculated by totalling the gross operating income for the first year and then subtracting this number from the first years operating expenses.
Seek Out Motivated Sellers
As with any business your customers are your most important asset, and without them your company won’t survive. Your job is to find sellers, in particular those who are willing to sell below the market value. The fact is that until you make a deal, nothing matters, and a motivated seller will help you to accomplish this.
A great way to evaluate commercial property is to go to open houses and study the neighbourhood. At an open house event you will be able to speak to other neighbourhood owners and search for vacancies.
Becoming successful in the commercial real estate industry is going to take more than a financial investment. You are also going to have to invest your time, energy and patience and remember that it may take some time before you see a return on your investment because success doesn’t happen overnight.