Commercial real estate investing can help you make a significant stream of recurring income and capitalize on financial leverage at the same time. But it can be hard to get started. If you have little to no real estate experience, or no investing experience, the idea of buying a property worth hundreds of thousands or millions of dollars and managing it effectively may seem like an impossibility.
However, as long as you’re willing to be proactive in your research and learn from your mistakes, almost anybody can go from total amateur to seasoned commercial real estate investor in a matter of years.
The Benefits of Commercial Real Estate
Why commercial real estate?
· Financial leverage. First starters, you’ll get access to financial leverage. While it’s possible to buy property using only your money, the majority of commercial real estate investors borrow money to fund their transactions. When you invest with borrowed money, you’ll increase the amount of capital you can put into various assets, essentially allowing you to multiply your potential returns without requiring anything additional on your part.
· Income potential. Commercial real estate is also a popular tactic because of its raw income potential. With a single property, you may be able to collect rental income and various forms of other income from multiple different tenants. You don’t have to wait 30 years to start collecting the fruits of your investment; you’ll begin generating revenue almost immediately, as long as you’re able to find someone to occupy the property.
· Triple net leases. Most commercial real estate investments benefit from triple net leases, distinguishing them from residential real estate. In these arrangements, tenants are usually responsible for things like property taxes and upkeep – reducing your personal responsibilities in the process.
· Unlimited possibilities. There’s no one right way to tackle commercial real estate investment. You can invest in real estate in almost any city, focus on one specific strategy or diversify your holdings, and you can try to buy one property or build an entire real estate investing empire. It’s all up to you and your personal objectives.
Tips for Starting a Commercial Real Estate Investing Strategy
So what’s the best way to start a commercial real estate investing strategy if you have no prior experience?
1. Start small. Even if you have significant capital backing your play, it’s a good idea to start small. You don’t need to have an entire portfolio of different properties in order to start seeing the benefits of this investment strategy. Usually better to start with one property that is relatively easy to manage, and scale from there.
2. Pick a niche. It’s also a good idea to pick a niche, rather than shooting for a broad, generic strategy. For example, you might choose to invest in senior housing as a commercial real estate asset class. This will enable you to get familiar with very specific localities, demographics, and types of real estate; you’ll also cut down on potential competition. That’s why, for the most part, it’s better to be a specialist than a generalist.
3. Work with professional advisors. Trusting your instincts is a bad idea when you haven’t had much time to refine your skills as a real estate investor. That’s why most newcomers are better served working with professional advisors. At minimum, you should be working with a real estate agent and a real estate attorney. But if you want even better and more detailed advice, you’re better off hiring a commercial property management firm.
4. Always do your due diligence. This should go without saying, but before making any major investment moves, you should be doing your due diligence. There’s a lot of research you’ll need to do on the property, the city, and the potential future developments in the area.
5. Build a team. Your advisors will be a good start, but it’s also important to build the team of other experts and professionals. You quickly realize how important it is to have people like electricians and plumbers at the ready in case of an emergency.
6. Look to the long-term future. When making decisions for your commercial real estate investing portfolio, try to optimize for the long-term future. You may not have trouble imagining the next couple of years for this property, but what is it going to look like in 30 years?
7. Estimate conservatively. Some people, when they enter the real estate investing world for the first time, become overly focused on best-case scenarios. They calculate their cap rate based on the most optimistic outcomes and they get a feel for how valuable the property could be – without realizing how unlikely such an outcome would be.
Commercial real estate investing isn’t something you can perfect overnight. Even the most veteran, intelligent investors still make mistakes and lose money on exchanges on occasion. If you’re going to make the most of this investment strategy, you need to be prepared for some setbacks and begin with an open mentality.