5 Tips for Smart CRE Investing
Many investors are drawn to the additional cash flow, securitization, and tax sheltering of commercial real estate. Many property managers offer services at an affordable rate that still allows the initial investor to realize a profit and sit back while collecting checks. Some smart ways to get involved in commercial real estate investing include:
Learn How Properties Are Valued
Commercial properties are valued differently than residential ones, which primarily rely on recent comparable sales in the same neighborhood. The value of commercial properties is usually based on cash flow and the credit of the tenant, as in how much the property owner can expect to derive from the commercial tenants he or she rents to.
Learn the Market
If you specialize in one sector of the commercial market, you can become an expert in the field. For example, you may know all about the hospitality industry or manufacturing businesses. If you already have knowledge in a particular area, start there with your investments. This knowledge can help you determine the best use of the property to maximize your cash flow. If you are new to the space, gain the necessary knowledge before you start to invest.
Make a Plan
It is critical to prudent commercial investing to set parameters for your investment. It is important to determine before making an investment what your budget is so that you can shop around for a suitable mortgage if necessary and to find properties that meet your investment goals. It is also important to make a plan regarding your expected monthly and annual profits, how many tenants you plan to lease to and how much space you need. Also, establish your metrics for your anticipated net operating income, cap rate, loan to value ratios and cash on cash rates.
Look for Good Deals
Just like residential real estate investors stand to make a profit if they find good deals, commercial real estate investors can also stand to realize gains when good deals come along. Some commercial real estate owners may be willing to sell below market value, such as individuals who want to retire or who inherited real estate that they want to unload. Distressed business owners may be another potential source for good deals.
Look at Long-Term Implications
Although cash flow is an important consideration, do not forget to look at the long-term implications of an investment. Consider what will likely happen to other commercial properties in the same area in the years to come. Consider whether the surrounding area may adversely affect the value or attractiveness of your property. Consider the economic opportunities available in the area and whether the area has features that will allow it to grow and prosper with time. Also, consider whether you will have to invest more money in the property to modernize it, replace the roof or make expensive repairs. Factor in these important points when considering possible investments.