Manage Your Future: Investing In Commercial Real Estate (Part 2)

This series, "Manage Your Future," is designed to provide comprehensive guidance on navigating the lucrative yet complex world of real estate investing.

In the first part, we discussed investing in residential properties, particularly single-family rentals. We delved into the critical aspects of the process, from understanding the calculations that dictate the viability of your investment to the practical realities of managing a rental property.

Having gained insights on residential real estate, we now shift our attention to another, potentially more rewarding, facet of real estate investment—commercial properties. While the initial foray of most amateur investors is a single-family residence, veterans in the field often propose commercial property as a potentially superior investment.

The Recession and Commercial Real Estate Opportunities

The global recession in 2008 led to a sharp depreciation in commercial real estate values, witnessing drops of 11% or more as reported by some financial institutions—this marked the most severe decline in 25 years. This seemingly adverse situation, however, provided shrewd investors with a silver lining. Despite the overall real estate sector currently being on a recovery trajectory, bargains are still out there for those who know where to look. To unearth these opportunities, you'll need a go-getter attitude, an understanding of market dynamics, and a willingness to conduct diligent research. Remember, with higher potential returns also comes greater risk.

Understanding Commercial Real Estate Investing

Commercial real estate investing is a different animal in the property market. Timing is critical to profitable returns. The complexities can be daunting, even for savvy entrepreneurs. Risks of investment include:

• Location: The location of any property can be “hot” or “not,” making consumers interest a fleeting proposition. Residential neighborhoods are established nearly from the get-go because of the proximity of schools, parks, transit access, businesses, entertainment venues, and such. Commercial property isn’t always as predictable. It is critical for the investor to know the market. Buyers should develop neighborhood farming tactics. Network, cultivate leads, evaluate the radius of vacancies, and monitor the local news and reports for business relocations. The right time and right place can mean scoring a great opportunity.
• Market Slumps: Prospectors can invest so heavily in real estate their liquidity becomes too fragile. It takes money to buy, sell and maintain commercial investments. In a soft market with abundant bargains, it can be tempting to forget the cost of a turn. While property presents a sure asset to sell in the event an infusion of cash becomes necessary, successful investors will exercise caution to keep their ledger in balance. It is better to find a motivated seller than to become a motivated seller.
• The Cost of Doing Business: Commercial real estate can present many of the same situations as single-family residential investments. Tenants come and go, leaving vacancies and a tenuous cash flow for owners. Litigation and the costs that come with it maybe necessary to pursue payments or to recover damages. Repairs, improvements, and other tenant demands absorb a good deal of cash and time.

Evaluating Commercial Property

In addition to the risks identified, the investor must understand the differences in the valuation of commercial property. It is essential that potential property owners know their limits, develop a viable exit strategy and consult experts to evaluate all the real estate metrics.

Assembling a Successful Investment Team

Successful commercial real estate investors will assemble a team to effectively analyze and forecast the potential of possible commercial investments, including:

• An Accountant to provide the financial assessment of what is affordable within current business portfolios and to predict cash flow, net operating income, cap rates, cash on cash returns, and tax implications.
• An Attorney to advise you on allowable uses of property and limitations of zoning, negotiate contracts, establish leases and secure deeds.
• A Commercial Broker to locate potential investment property, provide location analysis, and negotiate deals.
• A Mortgage Broker to sort through lending and other financial options and seek loans favorable to commercial purchases.
• A Property Management Company to provide the hands-on management of the property, recruit tenants, and coordinate repairs.

Assembling a trusted team, developing strategic practices, and maximizing market opportunities can result in a much bigger payoff on investments in building a robust commercial property portfolio.

Conclusion: Embarking on a journey into commercial real estate investment can appear daunting, given the potential risks and complexities. However, with the right tools, strategies, and a dedicated team of professionals, it can transform into a lucrative venture, providing substantial returns.

In this second part of our series, we've delved into the nuances of commercial real estate, highlighting the importance of location, timing, financial planning, and having a trustworthy team. Each of these elements plays a crucial role in mitigating risks and enhancing the potential for success in this challenging yet rewarding market.

As we venture deeper into the world of real estate investment, it becomes evident that these endeavors require more than just financial investment. They call for time, patience, diligent research, and, most importantly, knowledge. The more informed you are, the better your decisions and the more robust your investment portfolio will be.

Remember that the world of commercial real estate is not a solitary one. You're not alone in this venture. With over 30 years of combined experience, the professionals at Gordon James Realty Services can provide you the guidance and expertise necessary for your investment journey.

Click here to read the next chapter of the 'Manage Your Future' series, where we will discussing flipping houses.

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