Commercial Real Estate Investing 101: How to Get Started
If you’re thinking about investing in commercial real estate you’ve come to the right place. Making a real estate investment isn’t quite as complex as you’d think, and it’s known to generate some of the most impressive income streams. It’s important to remember to stay patient, carefully consider each decision and do your due diligence. Follow this guide of how to get started and begin your journey to becoming a successful commercial real estate investor.
What are the basics of commercial real estate investing?
The commercial property market mainly consists of shops, offices and industrial buildings like warehouses. If you invest directly you can either buy the property yourself or buy a fund which holds it in its portfolio, or indirect investments involve investing in property companies, housebuilders, and developers, or into funds invested in those companies. You can read more about the most common types of commercial leases in the UK here.
Is investing in commercial real estate right for me?
Before we go any further, consider the following three questions to determine whether this is the right business move for you both personally and financially.
- Are you ambitious?
You need to be open minded and a real go-getter to succeed in commercial property leasing. Even at the very initial stages of development, it’s important to be able to imagine how the property will look when finished. If it’s the choice between a three-unit apartment block or a large property with 15 units, chances are, in the long run, the latter will prove more fruitful.
- Are you great at building relationships?
Being an expert networker and relationship builder is essential for commercial real estate investors. This is mainly for financing purposes. If you’re paying over £1 million for the investment, it’s likely you’re going to need some sort of funding. The best way to find such capital is to get in touch with a personal private lender that you’ve already established a solid relationship with.
- Can you execute due diligence successfully?
Saving the most important to last, before investing in a commercial property you need to perform due diligence. After you’ve established your niche, start researching everything about that sector and your financing options.
5 top tips when investing in commercial real estate
- Stay on top of your finances
Keep a record of your income and expenses so you have an idea of how much you have to invest. Even if you don’t have a large amount of cash, if you have a solid employment history and a regular income, you should be able to get a loan.
- Get a pre-approval through a trusted mortgage broker/lender
If you have any concerns about being financially able to invest, speak to a broker/lender before applying to get a pre-approval.
- Set realistic goals that you can achieve
Every commercial real estate investor will set different goals, but make sure that they aren’t too high and are actually attainable.
- Consider the associated risks
Come to terms with the types of risks you are willing and able to take, as your investment strategy will be subject to your risk profile.
- Make budgeting and investment plans
To make sure you are maintaining a balance between income and expenses you need to budget. On top of helping you realise where your money is going, it is instrumental in you planning for larger expenses. You also need to develop an investment plan for your purchases so you can get a better idea of the returns you are striving for.
- Look out for evolutions and innovations in the industry
It’s important to be aware of trends in the commercial real estate industry and any risks that may arise.
How do I get started with commercial real estate investing?
To ensure your success in commercial real estate, don’t underestimate how essential doing due diligence is. The commercial real estate market and the residential real estate market have some striking differences, so it’s important to understand what these are before you undertake your investment.
- Get to grips with how commercial real estate differs
Firstly, commercial real estate leases tend to be considerably longer than residential properties. Secondly, the income from commercial properties is usually related to square footage, unlike residential real estate. Not only do these factors highlight how both types of property are valued differently, but it also demonstrates why commercial real estate investors are likely to earn a greater income.
- Think about your location
It’s important to think about the location and the type of tenant that the property will have. When working out the demand the real estate will have, the location and tenant type are two factors that are closely linked. For instance, a commercial real estate space intended for offices will be better placed in a city centre rather than a small neighbourhood on the outskirts of town.
- Research future developments of the area
It’s essential to analyse comparables (‘comps’) in the area you’re considering and any future developments that could occur during your lease. This will help determine the real estate’s current market value. These assets refer to what was paid for properties in a similar location, style and size recently. It’s best practice -and the most accurate- to choose a commercial property where the square footage is no more than 10 percent above or below the real estate being evaluated.
- Be confident with the success metrics
To be a successful commercial real estate investor, you need to be able to understand three main financial metrics;
- Cap Rate is used to calculate the value of income producing properties and helps investors get a better idea of future cash flow or profits.
- Net Operating Income helps investors understand how much they’ll make from the investment with the necessary operating expenses deducted. Operating costs include things like property management fees, insurance, utilities, tax, repairs etc.
- The Cash on Cash metric gives investors an insight into the rate of return on their commercial property transactions. This is most commonly relied on my investors who use financing to purchase their commercial real estate. The metric measures the return on out-of-pocked cash (direct payment of money from third-party source) invested relative to what was financed.