nvesting in commercial real estate can be a life-changing experience. Not only do you get the chance to build up capital, but you also get to learn about an industry that’s vital to economics. If you’re interested in this lucrative real estate sector, there are a few things you should know first.
How to Break Into Commercial Real Estate Investing Successfully
Whether you’re a real estate pro or a newbie, breaking into commercial real estate investing successfully requires a lot of research, skill, and practice.
Use the following tips to get started.
1. Keep Detailed Records
Preparation is key when it comes to commercial real estate, but many developers fail to spend enough time in the pre-investment stage. If you want to make better decisions, mitigate risks, and improve your operational efficiency, you need to invest in comprehensive project visibility.
One great way to do this is through commercial real estate historical data, which can be stored and tracked with software. For example, Northspyre can empower real estate development teams to achieve predictable project outcomes by leveraging automation and data analytics.
2. Research Your Market
One of the 5 rules for buying commercial real estate is “know what you’re looking for.” In this industry, knowledge is power. If you don’t know what a downtown New York office building should cost, you could overpay, lose the deal, or neglect to perform the correct inspections.
All markets, no matter how big or small, come with their own expectations and rules. Your investment strategy is mostly determined by your cash flow, free time, and location.
It’s a great idea to pick a niche prior to investing, and there are plenty available. If you want to stick to commercial office buildings in Phoenix, Arizona, then become aware of their zoning laws and inspection rules. Know your market inside and out before you ever write an offer letter.
3. Know How to Underwrite
Underwriting in commercial real estate is essential, as it provides a financial projection of your property’s potential cash flow. By calculating factors such as financing terms, expense growth, and capital expenditures, you can determine if a building or development will turn a profit.
While you can hire a professional to underwrite your investments for you, you’ll be paying at least $3,000 for this skill, and the process may take over a day. You can cut your time and costs significantly by learning to do this yourself, which allows you to invest faster and smarter.
4. Hire an Experienced Team
Commercial real estate investors will have a hard time succeeding without a great team. A commercial real estate broker, for example, is an expert who can help vet a property and negotiate contracts. Oftentimes, the buyer/seller will pay the broker’s fee, not the investor.
It’s important to ask the broker before assuming they’ll let you use their experience for free. Even if your broker charges a fee, it’s still cheaper to use their expertise in your strategy.
But brokers aren’t the only real estate professionals you’ll need. You’ll need a real estate attorney, building inspectors, general contractors, project managers, property managers, and property lenders. Make sure these professionals are experienced in commercial real estate.
5. Consider Financing Upfront
A commercial real estate loan is similar to a mortgage, except it’s used strictly for business purposes. Commercial loans usually have a 5 to 20-year amortization period and have a loan-to-value ratio of 65% to 80%. Your credit score determines how much interest you’ll pay.
If you’ve never applied for a commercial loan in the past, know that you’ll be subjected to long wait periods and a lot of paperwork. You should familiarize yourself with the process, so you can use your loans as quickly as possible. Get your loans pre-approved to lock in the interest rate.
