The commercial side of real estate can be an appealing proposition for any investor. It offers you the ability to dip into a new pool of clients and grow your business interests. But, the commercial real estate is also a different beast that requires some additional considerations versus the residential side of the business.
Patience is a virtue with these transactions as the sales cycle is longer, requiring an investor to remain vigilant with the market demand. But many indicators point to commercial real estate as a strong choice for agents looking to move their business forward in 2018.
We follow a guide by Forbes on things to do before you invest in commercial properties:
1. Remember Everything Takes Longer
Compared to residential investing, everything takes longer. Due diligence is months instead of days. Finding new tenants takes longer. Build out or renovation is longer. But the leases are longer, as well. Patience is key. It just takes longer.
2. Understand The Market
Investors need to understand the market they are investing in. Having a good wherewithal of the fundamentals (legal implications, competition, vacancy, rents, etc.) will allow them to make savvy investments that could yield high returns. This will enable investors to fine-tune their commercial real estate investments and diversify their portfolio.
3. Consider Area Demographics And Trends
When investing in commercial real estate, the investor needs to consider demographics and trends for the area. Do they play into the reason for investing? Do you plan to develop? If so, find a local realtor who understands the area and knows the playbook of the local authoritative agencies. You will need to understand civil engineering and environmental law in this playbook!
4. Assess Risk By Property Type
Risk assessment is very different in commercial when compared to residential real estate, and varies greatly by property type. The success of two residential properties right next to each other is typically similar, while commercial buildings in a similar position could fluctuate independently, so it’s important to understand the range of risks inherent to your potential investment.
5. Avoid Failing Businesses Or Business Models
If your tenants include restaurants, grocery stores, bars or business models that are migrating online (like banks), you need to assume that they will default on their lease at one point, and you need to prepare your insurance correctly to make sure you are covered when that happens. Search for failing businesses and do your best to not deal with them as there may not always be a golden parachute.
6. Know The Time Frame For All City Approvals
Different cities/towns have different permit approvals, it may take one-month ot even years prior to receiving a building permit. Hence, before buying a commercial property, set up a meeting with the local authorities to determine the required approvals — from planning and zoning, site plan, city council, etc.
7. Understand Market Trends’ Impact Demand
It’s important to understand the dynamics of the property type you are selecting. For example, if you are looking to invest in retail, consider the near- and longer-term impacts of e-commerce on tenant and consumer demand. If you are looking at offices, consider how trends like co-working and telecommuting could impact demand for office space in your market.
8. Be Ready To Have An Active Role
Investing in commercial real estate is not a passive investment. The most successful investors take a very active role. They have systems and processes in place to ensure that the property is achieving its maximum operating potential. They are constantly keeping tabs on development and economic trends in the local market, as well as broader economic trends.
9. Find Capital Or A Good Deal
To be successful in commercial real estate you need two things: capital or a deal. Currently, the market is flush with capital and if you can find an attractive deal, the equity will be there for you. If you don’t have a deal and are worried about high valuations, finding a patient source of capital should be your priority. Lining these two items up will give you the credibility to be successful.
10. Consider Commercial Real Estate Debt Instead
Some investors aren’t aware there is an opportunity to invest in real estate with less risk and greater potential return than property ownership — through investment in commercial real estate (CRE) debt. With returns in the range of 8-10% and a stronger standing than property owners in the event of a market correction, this opportunity is often overlooked by those looking to dive into CRE investing.