Have you considered buying a commercial real estate investment property after seeing the success so many investors before you have realized? Don’t worry, you are not alone. A lot of investors are curious to see if they have what it takes to add a commercial real estate investment property to their portfolio. I, however, maintain that every investor can do it, provided they mind due diligence and take the appropriate steps.
The real estate sector is firing on all cylinders, and 2017 is shaping up to be a great year for investors. Buy and hold properties, in particular, have seen a dramatic increase in rental asking prices, as a distinct lack of inventory and higher home values have forced many would-be buyers to flood the rental market.
Due, in large part, to today’s high demand for rental properties, landlords are finding they can demand a premium, and commercial real estate properties are no exception. As a result, more and more investors are looking to acquire a commercial real estate investment property to get in on the latest trend, but I digress. It’s not enough to demonstrate a propensity towards success as a residential real estate investor to be considered ready to invest in commercial real estate. There are several differences that exist between the two exit strategies — differences that can make or break a deal.
It’s in your best interest to prepare yourself for the jump. If you want to acquire a commercial real estate investment property to collect passive income, you must be ready for what’s to come. And the best way I know how to do that is to adhere to the following advice.
A commercial real estate investment property is unlike any residential property you have flipped in the past. A number of differences exist between the two, and that means each requires a unique approach. That said, if you are looking to make the jump from residential properties to commercial properties, you had better be prepared. And the best way to do so, at least as far as I am aware, is to practice the following tenets:
1. Don’t Reinvent The Wheel
In order to consider yourself a real player in the commercial real estate industry, you must carry yourself like a seasoned professional. It’s worth noting, however, that coming off as an experienced individual in your respective field doesn’t require years of cumulative deals under your belt, but rather a good mentor to show you the ropes. With the right person in your corner, it’s entirely possible to glean all of the information you need to become a successful commercial real estate investor.
Instead of blazing your own trail and leaving the future of your career vulnerable to mistakes, simply follow in the footsteps of someone that is currently where you want to be. What better way to get where you are going than to mirror the efforts of your successful predecessors?
Those lucky enough to align their services with a mentor that has realized success at a higher level will be given access to invaluable insight — insight that can very easily point them in the right direction. Therein lies the single, greatest benefit of working under someone that has been there and done that: you will be given access to a system — a blueprint, if you will — that can simultaneously help you mitigate risk and increase your odds of success. What more could a commercial real estate investor ask for?
2. Know What You Are Getting Into
It should go without saying, but a commercial real estate investment property is vastly different from a residential real estate investment. Today’s most prolific investors know it, and it’s about time you did, too. If for nothing else, it’s those that can differentiate the subtle nuances between the two that stand to realize the most success. Knowledge really is power, and the commercial real estate investment community is no exception.
In order to become a respected commercial real estate investor, you must learn to think like one. And as far as I am concerned, there is only one way to do so: ramp up your real estate education. The only way to think like a professional is to educate yourself like one.
Before you make the leap to commercial real estate, it’s in your best interest to understand the differences that exist between your new endeavor and residential properties. For example, know that a commercial real estate investment property is valued differently than a presidential property. Whereas residential homes gain a lot of value from intangible amenities and subjective concepts, commercial properties are more objective in nature. Namely, the true value of a commercial real estate investment property is found in its usable square footage.
Investopedia is also quick to point out that you will “see a bigger cash flow with commercial property. The math is simple: you’ll earn more income on multifamily dwellings, for instance, than on a single-family home.”
Of particular importance, however, are the differences in payment options. Seeing as how commercial real estate investment properties are typically more expensive, it stands to reason the method for acquiring them is also different. Don’t think it’s as easy as buying a single-family home. As Investopedia so eloquently puts it, commercial lenders “like to see at least 30% down before they’ll give a loan the green light.”
3. Go In With A Plan, Or Two
If you have already conquered the world of residential real estate investing, there’s a good chance you are well aware of the value of a sound plan. Otherwise known as an exit strategy, your plan should help you navigate everything that comes your way — everything. Anything less is unacceptable.
I am convinced that even the perfect commercial real estate investment property needs to be acquired by an investor with a plan in place. Anything less is a practice in ignorance, and exposes you to unnecessary risk — the investor’s mortal enemy. That’s why I insist setting specific parameters prior to taking on any commercial real estate deal. What’s your exit strategy? How much can you afford to pay? How many loans should I look at before I land on the right one? Do I have tenants lined up already? Will I use a property management company?
The are only a fraction of the questions a good plan must answer, but a good place to start, nonetheless. That said, I encourage you to sit down with that mentor I discussed earlier and iron out a “bulletproof” strategy. The more detailed your plan is, the better. You should know exactly what to expect, when to expect it, and how to deal with it — regardless of what “it” is. And once you are comfortable with the logistics of your plan, make a backup plan. A contingency or, better yet, a plan B, is never a bad idea when dealing in something as large as commercial real estate.
Knowledge Is Power
In today’s market landscape, a commercial real estate investment property can be a wise decision. It’s worth noting, however, that not unlike every other investment vehicle, commercial real estate properties come complete with their own nuances. And those that can not only identify them, but also navigate them, will place the odds of realizing success in their favor. If you hope to do the same, I recommend following the three tenets I highlighted above.