Manage Your Future Pt. 2: Investing in Commercial Real Estate
While most casual investors begin real estate prospecting with a single-family residence, experts often advise looking to commercial property as a better investment.
After commercial real estate values plummeted with the recession in 2008, savvy investors found opportunities in the bad market news. Some financial institutions cited a decrease in values of 11 percent or more – the sharpest drop in 25 years. Now real estate, on the whole, is in recovery mode, but bargains are still available. Finding prime opportunities takes a hunter mentality. With the potential of greater gain also comes greater risk. Unearthing the sweet spots in commercial real estate requires attention to market variables, due diligence, and solid partnerships.
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, location, 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.
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.
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.