Ask any real estate professional, such as Keith Knutsson, and you’ll get an in depth monologue on how commercial properties are a better deal than residential real estate. But how do you know which are the most valuable properties and which would be poor investments?
Here are 10 tips to help you make the best decisions when investing in commercial real estate:
Number 1 - Go Big or Go Home
When you are looking to purchase real estate, such as apartment units, buying only 5 units may require you to get commercial financing, which becomes a hassle, and then it becomes a question of why bother? To make it worthwhile think 10 at least for your bottom number. Keep in mind that managing 50 units is no more difficult than managing 10, so why not go for it?
Number 2 - Be Patient
Single-family housing investments take less time to purchase than commercial property. Commercial property can come with the task of renovation, which is not necessarily a bad thing, but is something to keep in mind, so you do not rush into a bad decision.
Number 3 - Apartments Shouldn’t Always Be Your Default Purchase
Consider other types of commercial property, such as office and industrial buildings. Most investors will feel comfortable investing in residential property and will overlook the potential that other building may have.
Number 4 - Prepare for a Time Consuming Journey
Be prepared to spend a great deal of time during your first deal and try not to become discouraged. There is no set-in-stone system when it comes to property investment and understanding that it may be a long process will make it easier in the long run.
Number 5 - Formulas
Net Operating Income and Cap Rates will come with different formulas, such as buying at 80% after “repaired value” minus the estimated price of the repairs. Get familiar with which rates are best within your area before making an offer.
You should also be aware that the formulas for property in the United States may be different from purchasing property overseas. Keith Knutsson gives more insight on real estate trends in Europe virus the U.S. for those looking to purchase internationally.
Number 6 - Build Relationships
Having trusted relationships with other investors and private lenders is extremely important when buying commercial properties. Often property will be sold without being listed, so the more people you have in your network, the better chance you have of knowing what is available.
Number 7 - Find Good Financing in Advance
Residential loans are much easier to obtain, but commercial loans are a different beast and usually require a higher-percentage down payment. Ask around and learn who the best lenders are in your area, it could make the difference between qualifying or not qualifying for a loan.
Number 8 - Loss of Diligence Money
A window of time for due diligence can be short lived after your offer is accepted. Make sure you have the property inspected, get an appraisal, and have tests and inspections done that are required by law. You may discover that you have invested money on a deal, only to make the decision not to buy it after all. Always be prepared for these kind of expenses.
Number 9 - Find Partners
Most people do not have an extra million sitting around in their bank just waiting to be invested in commercial property, and qualifying for high-priced loans can be difficult for one person. Having a partner to invest a percentage of the money allows you an advantage in qualifying for the credit to purchase big-ticket property.
Number 10 - Ask the Hard Questions
Knowing what questions to ask is a step in the right direction, but knowing who can answer them is twice as important. Find associates with experience in the commercial-investment world. Ones who have experienced some of the roadblocks you may come up against and can give advice on how to avoid them. Know who to ask for fast answers and keep those people close.
Investing in commercial real estate is exciting and following these few tips will help make the journey and end result successful, profitable, and worth the hard work required to find the best property for you.