Getting Started with Commercial Real Estate - Part 2

Last month, we covered the basics of commercial real estate; what it is, and the benefits of investing in it. Seeing the many benefits and potential wealth begs the question, where exactly should you start? Though commercial real estate investing doesn’t come with a simple 5 step plan, there are some solid bases to cover when getting started. 

Tips for Getting Started with Commercial Real Estate

It’s all about due diligence

If we could offer a single piece of advice on where to start, due diligence is at the top of the list. Due diligence in real estate refers to the process of conducting a thorough investigation of a property before making a purchase. It typically includes reviewing documentation, conducting site visits, and analyzing financials to ensure the property is a worthwhile investment. Due diligence can reveal issues such as zoning problems, environmental hazards, or inadequate income potential that may make the investment undesirable. This is one of the most vital steps in the process because if you don’t do your homework, it will most certainly cost you.

Learn the differences between commercial and residential

If you’ve been investing in residential real estate and feel ready to take a dive into commercial, just know - these two investments are not the same. For starters, commercial real estate is valued differently than that of residential properties. Not only are they valued differently, but so is the size of the investment which may require more capital upfront. These key differences, along with factors like lease terms, location, tenant type, and market conditions all vary significantly from that of a residential investment.

Understand the formulas 

If you want to identify the best possible real estate deals, it’s necessary to brush up on key metrics in order to evaluate an investment property appropriately. These formulas will help you better analyze a deal and forecast the potential value of your investment.

Net operating income (Gross rental income minus expenses)
This number can forecast how much you stand to make on your investment minus the operating costs. 

Cap rate (NOI divided by the purchase price of the building)
This formula gives you an idea of future profits or cash flow. 

Cash on cash (Annual cash flow divided by the cash you’ve invested)
This provides investors with a rate of return on their transactions. If you’re going to boil it down to numbers, this metric will give you the return on out-of-pocket cash invested relative to the portion that is financed.

There are a variety of financial metrics that are important to use when analyzing a commercial investment so let this be the shortlist to get you started.

Build a team of trusted advisors

Regardless of who you hire (even though Wheeler Commercial seems like the appropriate choice), an overwhelming majority of agents will agree, having a strong team equips you with the knowledge and in-depth understanding needed to make a smart, successful investment in commercial real estate. A team of trusted advisors (including a commercial agent, property manager, lender, insurance agent, and attorney) will further your process of due diligence and cover the intricate details involved in a commercial transaction.

Mistakes to avoid

Mistakes, of course, are often how we learn, but with regard to real estate investing, some mistakes could cost you a very pretty penny. The single greatest thing you can do when it comes to investing in real estate is mitigate risk and to do that, it’s important to know what common mistakes to avoid.

Neglecting due diligence

Not doing enough research - It is essential to conduct thorough research on the property and factor in market trends before investing in commercial real estate. Failure to do enough research may lead to investing in properties that are not profitable. 

Ignoring the property location and tenant type - Location plays a significant role in commercial real estate investing as does your intended tenant. Overlooking these factors can hinder your view of how a potential investment property will perform in the long run.  

Financial ignorance

Improper valuations - Overestimating rental income can lead to losses in the long run. Ensure that rental income projections are realistic, and rent rates are in line with market trends.

Failing to account for expenses - Commercial properties come with various expenses, including property taxes, insurance, maintenance costs, and management fees. Failure to account for these expenses can lead to overestimating profitability.

Overleveraging - Taking on too much debt can be risky - overleveraging can hinder a property’s profitability, especially when market conditions change.

Not working with a team

We’ve said it before, but we’ll say it again - this is not the time to fly solo. Maybe it seems worthwhile to save a little bit of money by going at it alone, but commercial investments are not the time to cut corners. It’s important to have a team you trust to ensure you cover all your bases because your investment will be far more successful and profitable in the long run.

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