Investing in commercial real estate can be a lucrative venture, offering opportunities for substantial returns and portfolio diversification. However, navigating this complex market requires knowledge, strategy, and intuition. Whether you are a seasoned investor or just starting your journey in commercial real estate, understanding the key tips and best practices can make all the difference. In this resource, we will explore essential strategies and insights to help you make informed decisions, mitigate risks, and optimize your investment outcomes in the ever-evolving landscape of commercial real estate.
Tips for Commercial Real Estate Investing
Before investing in a commercial property, it's crucial to conduct thorough research and assess all potential challenges.
Define Why You're Investing
Although it might seem trivial, understanding your "why" is crucial. Why are you investing? Why choose commercial real estate, and why now? Clarifying your end goal is vital. What do you aim to achieve by investing in commercial real estate? Once you establish your "why," you can identify the types of properties that will help you reach your objectives.
As you develop and diversify your commercial real estate portfolio, keep your original reason for investing at the forefront. Let it guide your decisions. This clarity will provide direction and help you steer clear of investment options that don't align with your goals.
Research the Market
Researching the commercial real estate market before investing is a critical step that can significantly impact your investment success. The CRE market is complex and ever-changing, influenced by factors such as economic trends, local zoning laws, and commercial property values. By conducting comprehensive market research, you gain valuable insights into these factors, allowing you to make informed decisions. Understanding market trends helps identify high-demand areas and predicts future property appreciation, ensuring your investments yield favorable returns. Moreover, analyzing the local market conditions can reveal potential risks, enabling you to devise strategies to mitigate them. In essence, thorough market research arms you with the knowledge to align your investment decisions with market realities, maximizing opportunities while minimizing potential pitfalls.
Determine Which Type of Commercial Real Estate to Invest In
Purchasing commercial real estate differs from acquiring a residential property. It offers the opportunity for quick buying and selling or leasing to businesses for profit. First-time commercial real estate investors should familiarize themselves with the various types of commercial properties. As a beginning investor, you should zero in on one type of commercial real estate at a time. Select the type of property that interests you and explore how businesses utilizing these properties function. Once you've gained sufficient knowledge, you can begin investing in different property types.
Types of Commercial Real Estate
The four main types of commercial real estate are multifamily, office, industrial, and retail properties.
Multifamily:Â Multifamily commercial real estate involves two or more residential properties owned by an investor. Each unit houses a tenant or family. The owner is responsible for maintenance, leasing, and management. For those with limited capital, multifamily real estate is a good start for a CRE portfolio. Investors can secure financing more easily than other CRE types, and the closing process is faster. Multifamily investors often begin with a few properties, then use tax advantages like a 1031 Exchange to upgrade to larger investments. Over time, multifamily investing builds wealth that can be passed down to future generations.
Office: Office properties are a favorite among CRE investors, offering a diverse range of options. These can include anything from a modest single-building setup ideal for startups to expansive multi-story office complexes leased by major corporations.
Industrial: Warehouses, factories, and distribution centers all belong to the category of industrial properties. These facilities are specifically designed to cater to the needs of manufacturing plants or logistics hubs. Due to their minimalist construction, they are generally more affordable to purchase and maintain. Consequently, investors are increasingly attracted to the industrial market as returns grow. However, the downside is that industrial commercial real estate primarily appeals to a niche tenant market, making leasing a potential challenge.
Retail: Retail real estate encompasses properties where businesses sell their goods, such as grocery stores, strip malls, shopping centers, or standalone shops for small businesses. Typically, an investor acquires the retail space, and then a business owner leases it from the investor.
Prepare & Plan Finances
Before making an offer on a commercial property, know your budget and have your financial plan ready. Decide how you'll pay— whether through a loan or cash up front— and set your limits. Applying for financing first saves time and strengthens your offer. Pre-approval shows you're serious and can close quickly.
Having a knowledgeable CPA can guide your decisions. During loan underwriting, lenders will review your cash flow statements, credit history, and net worth. Be prepared with these documents! Additionally, you need a business plan to get approved for any loans. Lenders want assurance that you can repay the loan. Outline how you'll use the property and project your investment return, and be sure to share your business plan with the lender.
Due Diligence is Crucial
Just as with all real estate purchases, when you buy a commercial property, it’s your responsibility to ensure that property is a good investment. Not conducting thorough due diligence on properties you're interested in purchasing is one of the biggest things to avoid when investing in commercial real estate.
Risk Due Diligence for Commercial Properties
An environmental assessment is a comprehensive evaluation of a property to identify existing environmental contamination or conditions that might lead to future contamination. Its purpose is to uncover potential environmental issues that may necessitate remediation or impact the property's value and usability.
Using LandGate's LandApp tool, you can assess man-made and environmental risks for commercial properties and undeveloped land nationwide. The risk index scores evaluate a property's potential for various natural disasters and contamination risks scored on a scale of 0-100:
Proximity to Amenities
Evaluating a property's proximity to amenities is another critical aspect of commercial real estate investing. According to Cushman and Wakefield, among the top five most common amenities are both on-site parking and access to public transportation within two blocks. Other amenities that make commercial properties more attractive to potential tenants are restaurants, gas stations, EV charging stations, hotels, and schools.
You can evaluate any property's proximity to these amenities and more with LandGate's LandApp tool:
Know How to Protect Yourself & Your Assets
For commercial real estate property owners, especially those new to investing, safeguarding your properties and all financial and physical assets is vital. Unfortunately, CRE investors face a heightened risk of lawsuits. Therefore, it is essential to protect yourself by forming an LLC or establishing other legal safeguards.
Have a Plan for Leasing & Property Management
Managing tenants can be a demanding, full-time responsibility. If you intend to lease out your property, it's crucial to have someone manage the daily operations. Hiring a property management company can alleviate this burden, allowing you to concentrate on your career or expand your real estate portfolio while the management team ensures everything runs seamlessly.
A property management team provides a wide array of services. They act on your behalf to maintain the property and address tenant emergencies. Property managers handle tenant communications, rent collection, hire maintenance professionals, and solve any issues that may arise.
For smaller properties, you might need to manage them yourself initially as you grow your portfolio. However, self-management has its challenges. It can be difficult to deliver bad news to tenants, and owner-managers often find themselves conceding to lower rents or being lenient with rent collection. They might also agree to repair issues that should be the tenants’ responsibility.
Work With a CRE Professional
Working with a commercial real estate professional can be invaluable when investing in properties, as they bring extensive knowledge and experience to the process. These experts are well-versed in market trends, property valuation, and negotiation tactics, offering critical insights that can help investors make informed decisions. CRE professionals can identify potential opportunities that align with your investment goals, mitigating risks associated with property acquisition. Additionally, they often have a network of industry contacts, such as lenders, inspectors, and legal experts, which can streamline the complex layers of a CRE transaction. By leveraging their expertise, you can navigate challenges more effectively, ultimately enhancing the likelihood of a successful and profitable investment.
Getting Started with Commercial Real Estate Investing
Commercial real estate investing can be a rewarding endeavor, but it requires careful planning and strategic execution. By securing financing, conducting thorough due diligence, evaluating proximity to amenities, protecting your assets, and planning for property management, you can mitigate risks and enhance your investment potential.
Equipping yourself with the right tools and guidance can significantly impact your success. LandGate's LandApp is an indispensable all-in-one property due diligence tool for commercial real estate, providing comprehensive insights and facilitating more informed, confident investment decisions. With the support of professional expertise and robust tools like LandApp, you can navigate the complexities of commercial real estate with increased assurance and achieve your investment goals.
