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Business professionals have long been drawn to commercial real estate (CRE) because it can provide steady returns, significant growth potential, and passive income. In recent years, investing in CRE is rapidly increasing in popularity. Though this alternative investment can bring a profit, it’s essential to understand that not all CRE investments are created equal.
If you want to succeed in your first investment, you must know the ins and outs of CRE and work with people who can guide you on your journey. You must also understand the common risks and mistakes so you can avoid them before committing to a purchase. Consider this guide from SD Janitor for getting a strong start in commercial investing:
Hiring Professionals
Perhaps the most important thing to remember as you begin your CRE investment journey is that you should not try and do everything yourself. There are plenty of professionals to help you succeed and avoid pitfalls.
For example, work with a real estate agent or broker who specializes in commercial properties. Partnering with a brokerage is a good way to help distribute some of the risk of real estate investment. Also, find a reputable financial advisor who can help you navigate your personal and business finances along the way.
While you own and manage a given property, it’s wise to see to its upkeep in order to keep tenants happy. For cleanliness and janitorial services, trust SD Janitor to keep your property clean and your tenants pleased.
Different Property Types
Commercial real estate comes with many different asset types. Office, retail, industrial, multifamily and special purpose are the primary sectors. With that said, land, self-storage, hotel, and medical are other common property types. When researching, you will notice that the profitability, returns, and supply and demand vary significantly across sectors.
The supply and demand in a specific location will impact how certain property types perform. However, there are sectors that generally perform better than others on a macro level, so you will need to distinguish which ones promise the most profit in the current economy.
For example, industrial properties are performing the best at the moment, while retail space is at the bottom. Practically speaking, online shopping trends are harming the growth and returns of retail space.
Another thing to consider is that specific CRE sectors generally come with higher vacancy rates than others, especially those that serve a single tenant. That is why many investors opt for sectors or properties with multiple tenants.
Different Markets
As with sectors, every commercial real estate market is different. Anytime you purchase a property, it means that you are investing in a geographic location with unique supply and demand. Make sure to do in-depth research before making a purchase. For whatever kind of property you’re considering, try to talk with as many people and gather as much data as you can about the associated market.
Even if a particular type of property is performing well on a macro level, you need to ensure there is no oversupply in the area and vice-versa. Don’t make the mistake of ignoring the risk of market saturation.
As you begin your research, look into the immediate area’s market supply, including the current rentable square footage and potential square footage that could be added through construction or planned developments.
Market Cycles
Many factors directly impact commercial real estate profitability. GDP, unemployment rate, and the overall state of the economy frequently change, and it’s essential to know how real estate market cycles function.
That way, you can reduce the likelihood of purchasing in a seller’s market and having to sell in a buyer’s market. Understanding how to read various market cycles can also help you identify a good opportunity when you see one and make informed decisions as you invest.
Researching Investment Opportunities
Before signing the dotted line, you will have a due diligence period during which you can thoroughly research the investment opportunity. Many aspects are worth looking into, such as reviewing the previous owner’s financial documents, profit and loss statements, and tax returns.
This is also an excellent time to conduct property inspections and surveys. Many first-time CRE investors speed through their due diligence out of excitement to purchase a property. Try to avoid that because it can cause you to overlook risks and challenges that can hinder your yield and profitability.
Make sure you know what to investigate, analyze, and inspect before purchasing so that you can avoid costly mistakes. Consider creating a checklist for your due diligence tasks. Here are a few responsibilities to tackle:
- Learn about the city’s or municipality’s permitting procedures and expenses.
- Evaluate how many units the specific market can accommodate should you choose to build a new structure or expand an existing building.
- Make sure zoning laws will permit you to use your property adequately if you determine to develop a vacant property.
Leaving Room for Margin
One problem that many commercial real estate investors run into is establishing unrealistic timelines for reaching market rents, fully leasing, renovating, or building. All of these things take time, and you can expect there to be setbacks and obstacles that hinder your progress.
Do your best to identify any potential challenges as you research your investment opportunity and develop a plan of action for responding should they occur.
Cost Contingencies
Every investment comes with uncertainty. You can conduct flawless research and verification, but there are always unknown factors that can impact your yield (positively or negatively).
As such, it’s critical to set aside additional funds from your initial acquisition costs to cover unexpected expenses from leasing, raising rental rates, renovating, rezoning, and other activities. If you are under a debt service, you can use cost contingencies to pay for those as well.
In many cases, an investor experiences negative cash flow while making improvements to the property, and cost contingencies can prove valuable in that instance too. Plan to set aside 5% to 15% for your contingency budget. While you’re at it, make a replacement reserve or capital reserve fund.
Conclusion
If you are looking to expand your investment portfolio as a business professional, commercial real estate could provide some excellent opportunities. But to succeed, it’s crucial to understand how CRE works and learn how to identify all the factors that can impact the profitability of a property.
Consider the information and advice above as you prepare for your CRE investment journey. And remember to dedicate time and energy to thorough research and preparation.
To keep your commercial tenants happy and your properties clean, reach out to SD Janitor today!
