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Ray Martin of Easton CT
Being successful in commercial real estate takes more than just initiative. It takes time, money, relationship building with brokers, real estate attorneys, and insurance agents.
There are many types of commercial real estate you can invest in. Those include:
Office buildings
Industrial properties or warehouses
Retail buildings, like strip malls or shopping malls
Multifamily housing, like apartment buildings
Self-storage facilities
Hotels
Another option: Mixed-use commercial properties. Mixed-use properties combine two or more types of commercial use into one building or development, like a building with shops on the first floor and residential real estate with tenants above.
Investing in commercial real estate is not a “quick fix” to wealth. Although when done properly, it can lead to a lifetime of stable income for an individual and their families. A good investment can and should provide enough financial gains to eventually cover the initial investment and allow for continued monthly income.
However, there are barriers one might encounter when trying to purchase a commercial real estate property.
Barriers to investing in commercial real estate
1. Experience
Any commercial real estate investor should have some prior commercial real estate investing experience. If there is absolutely none, it is a good idea to partner with someone who has experience in the same asset class that you are trying to purchase. They can also help you better understand the commercial real estate market, which is completely different from its residential sibling.
If that is not an option, hiring a well-positioned property manager can help a new investor overcome the challenges that will be faced in this new endeavor. A property management company with enough experience can serve as a good backup to your own lack of prior commercial real estate experience.
2. Due diligence
Due diligence includes looking into the financial background of the property, the demographics of the property—its location and tenancy figures—the property class that it falls under, and how many times it has been resold in prior years. Properties that are resold countless times may potentially be a bad investment, and investors should proceed cautiously with them.
Follow commercial trends closely and learn to better predict which types of properties will be sought after. This will help you get the best bang for your buck and increase your success in real estate investing. Always be on the lookout for new vacancies and use commercial trends to determine prices for rents.
Certain areas are much more expensive for all types of housing than others, and this must be kept in mind when researching where to purchase. Cost of living expenses per geographic area are a good indicator of the amount of investment needed before considering purchase. Certain geographic areas simply have higher costs of living overall, and housing prices can vary tremendously.
3. Financing
Being able to qualify for commercial financing based on your balance sheet can be a challenge. This will vary significantly from one investor to the next. An impressive balance sheet can be the difference between obtaining a commercial property or losing the bid.
A good balance sheet will show a steady income, healthy cash flow, and budget knowledge. It can include but is not limited to:
Profit and loss statements
Stocks and bonds held
Investment properties owned
Various other short- and long-term investments
Proof of the ability to pay mortgages over extended time periods.
Close attention should be paid to sustaining and maintaining a strong balance sheet and any negative influences should be remedied.
Create an investment plan and determine your financial and investment goals. From there, you can decide how much you want to invest. You can determine this by understanding your net worth and your risk tolerance.
Planning not just how to pay initially but also the overall profit picture years down the road should be considered. Closing costs and needed repairs to the property in question should always be factored in.
4. Liquidity
Liquidity is defined as the ability to turn assets into cash as quickly as possible. Investors should always have enough liquidity to cover at least the down payment, closing costs, and any renovation fees that might be needed. This will vary from property to property.
Any other assets that are owned should be able to be liquefied quickly. Too many assets that are tied up and not easily liquefied can work against investors.
All initial financial outlays, such as the down payment, the closing costs, and the renovation fees, should be figured into the liquidity aspect before considering a purchase or making an offer on a commercial property.
5. Research
Research into the overall market in prior years or the current year can be overlooked by many.
The real estate market—especially the commercial one—can rise and fall sharply within months. There are times to buy and times to withhold a purchase. There are geographic areas that are going up at certain times, while other areas go down, as well.
These statistics are readily available online by the National Association of Realtors (NAR) and are updated regularly. Market fluctuations can be very impactful on the price of an initial sale and the overall stability of a property in future years.
6. Well-formed team
Commercial real estate investing is a venture - plain and simple. Not having others involved who can assist an investor, especially an inexperienced one, can only lead to headaches. You’ll need a:
Commercial real estate agent with experience in commercial real estate
Real estate attorney
Property manager, especially on multifamily properties—an investor trying to be both manager and investor can get overwhelmed
Reputable (and licensed!) contractor
Private individuals or financial institutions that can loan money immediately outside the initial investment if unforeseen circumstances arise
Insurance agent on board
Summary
Commercial real estate investing is a great choice for many reasons.
This is not to say there are no risks involved, as there are many. Investing in any type of real estate, especially in higher priced commercial real estate is risky. The market goes up and down, the area demographics can go up and down, and the overall price of resale can go up or down.
Add to that any changes made to the property. Improving a property can initially add additional rental income. However, occupancy drops during renovations—and hence income generated decreases, too.
As you can see, commercial real estate investing is a great way to diversify a portfolio—if an investor can overcome all the barriers to entry. Doing the research and following the guidelines to overcoming such barriers above will help both novice and experienced investors immensely.
Contact Ray at ray@theraymartinagency.com or 203.900.8975
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