by Mike Kushner, CCIM
Investing in commercial real estate can be one of the most lucrative investments you can make. Investors can realize extraordinary capital gains and huge cash flow wins. On the flip side, there can be a drastically different outcome when your CRE investment properties sustain long vacancies or big drops in market value.
For many reasons, investing in commercial real estate can be a higher risk than other types of real estate investments, or other investment types. That’s why it’s so important to be well-versed in the nuances and trends of the industry, or to have a trusted advisor who is. In order to put yourself in the best position for a favorable return on your investment, there are certain things you should think about and understand.
1. Creating a Solid Plan
Before you embark on any big undertaking, investment or not, you should begin with a plan. Prior to investing your hard-earned money or equity into a commercial property, you should have an investment plan in place that fully equips you to identify the right property for your portfolio. Without a framework to guide your decisions, you may make the mistake of buying a property on impulse or out of pressure from others even if it doesn’t really fit your goals for long-term strategy, risk levels, hands-on involvement, capital growth, and cash flow.
2. Understanding the Time Required to See a Return
Next, do your research to gain an understanding of a realistic time frame for seeing returns. Many new investors dive into things thinking they’ll surely see a return in a fraction of the time it actually takes to develop the investment and make it profitable. Pulling out too early can mean losing a substantial part of your investment, so make sure you plan for the appropriate length of time that your money is likely to be tied up.
3. Joining with Other Professionals Who Share Your Goals
Successful commercial real estate investors rarely go it alone. They build a team of other professionals who share their same goals. A successful team can include a commercial buyer’s agent, appraisers, commercial property inspectors, engineers, lenders, and closing attorneys – just to name a few. All of those people are an essential part of achieving success in real estate investing, and they work together to set a clear strategy, conduct detailed research, and source the correct property at a fair price and with the right conditions to fit your investing goals. When it comes to choosing your team, choose wisely. Others involved should complement your shortfalls in knowledge, and in return you may be able to supplement theirs.
4. Comparing and Contrasting Investment Opportunities
It may seem obvious, but those new to commercial investing often overpay for properties. One of the best ways to avoid making this mistake is to know where the value point is on the property, be fully aware of comparable prices for similar properties, and to not become overly focused on the cash flow or lease structure. Paying too much for a commercial property locks up your funds in a more rigid way than it could with residential property. Banks are far more reluctant to provide equity releases or cash outs for commercial investing gone wrong, so you need to be thoughtful about where and how you’re spending your money.
5. Doing Your Due Diligence
It’s okay to start out with a more cautious approach. One of the biggest mistakes new cre investors make is signing on the dotted line without doing their due diligence. If this feels like a daunting task to take on, consider working with an experienced buyer’s agent whose job it is to analyze the property’s cash flows, educate you on market value and market lease rates, and recommend other professionals who can help you on your journey. It takes time, resources, and an understanding of market conditions to fully vet a commercial investment opportunity.
6. Considering Additional Expenses
Smart investors know they must carefully allocate their budgets to allow sufficient coverage for additional expenses. These could include mortgage payments, taxes, insurance, management, and marketing. When you don’t have enough cash flow to fund these areas, your property can quickly become a liability instead of an asset.
7. Keeping an Open Mind
Just because your former tenant was a medical office doesn’t mean your new tenant has to be. This is why buying versatile commercial real estate properties that allow a number of options is a wise strategy, especially when you’re starting out and don’t have a diversified portfolio. When the real estate market fluctuates, you’re better prepared to tackle unexpected situations and will experience fewer losses than more rigid investors.
8. Having Contingency Plans
Finally, and most importantly, you need to have one (if not multiple) contingency plans in case things should take an unexpected turn. Investing in commercial real estate always comes with risks, some more than others. You need to be prepared to lose it all. You should have a plan in place for how you will react and rebound if that happens.
Are you ready to begin investing? Our listing team is ready to connect you with properties that fit your investing goals. Contact us today to begin your journey.
This article was originally published on the Omni Realty Group website by Mike Kushner, CCIM. Omni was an exclusive buyer agent/tenant rep commercial real estate firm owned by Mr. Kushner prior to his joining the Capstone Commercial team. It has been adapted and reposted with permission. See the original article here.
