You may have heard that now is the best time to invest in real estate. Yes, the market has picked up following the recession and commercial real estate market is once again an opulent field of opportunities. The rental returns associated with commercial spaces are higher than what you can expect to gain with residential real estate. Besides, the expenses such as council rates, insurance, and property management fees can be avoided. This is not to say, though, that you should rush things.
Facts and figures
After all, making an informed decision is dependent on a complex matrix of multifarious factors. From the market standpoint, the timing is good, but this is only one part of the equation. You ought to learn the basic vocabulary first and heed the forces that drive market activity and growth. First and foremost, you have to understand that unlike residential real estate, commercial properties are not bought for capital growth, but rental return. Make sure you are familiar with key metrics such as capitalization rate, which refers to the income of the property divided by the total value of it.
It is never a good time to invest unless you develop a deeper understanding of the market and conduct a research. There is no one-million-dollar question that holds the key, but a host of ones you need to provide an answer to. To move forward, concentrate on one crucial calculation. Namely, subtract PITI (principal, interest, tax, and insurance) from the annual revenue, and ensure that the property is in the black. Just don’t get caught up in cold figures too much and forget that you must work closely with real people, your customers.
Risks and payoff
Likewise, do not go on a hunt before you grasp the other realities that shape your prospects. It should be simple, right: Buy a property well, spruce it up, and then rent or sell it. Alas, in practice, hiccups and hurdles can always impair the advance towards financial success. There is always a risk involved, and the greater the returns, the bigger it is. The main roadblock is certainly vacancy: Losing a tenant and not being able to find a new one gives rise to a difficult financial situation.
Even those who know the market backward and forward cannot achieve everything on their own. They rely on commercial real estate professionals and services to help them with some steps. Leases of commercial property are much different to those of residential spaces, suggesting lawyers come in handy. Over the course of your investment journey and based on the type of property you look to invest in, you may also have to work with accountants, mortgage brokers, commercial realtors, appraisers, engineer, and tax experts.
Get to know yourself, assess your situation, and come up with a budget. Prepare your finances, and evaluate a cash situation as well as an ability to make down payments. Decide whether you want to work with banks, home mortgage companies, or credit unions. In case the traditional methods do not work to your advantage, try to think outside the box. Note that crowdfunding has entered the limelight, with investors pouring millions and millions of dollars into innovative platforms like FundRise.
All in all, you have to visit and take into consideration a slew of properties. To make your life easier, focus one type of property (industrial, retail, offices), knowing that each one has its pros and cons. Furthermore, always pay close attention to the location. Properties near downtown areas and close to public institutions and other amenities tend to sell faster. Another crucial aspect is how much time you would be able to commit to the property. Finally, ask yourself if you’re willing to invest money in repairing, renovating, and remodeling the space.
Tricks and tools of the trade
Commercial real estate is a centerpiece of many investment portfolios. The asset class did not have an easy ride in the past, but things are looking up now. Yet, investing is not a game of chance. What you need is to develop a sound strategy on how to survive and thrive in an income-driven market. Make the extensive checklist of questions you need to ask about each property you target. Define the ideal type of property and employ the right tools to locate it. In case you have covered all the bases, go ahead, and hit it big.