Commercial real estate (CRE) is known for offering better deals than residential real estate. Sure, there is a lot of work involved, but investing in a commercial building or space can yield a ton of benefits. Property owners often enjoy more cash flow, economies of scale, an open playing field, plenty of top-notch property managers to choose from, and more.
However, if you’re a business professional who wants to make your first CRE investment successful, you must know how to distinguish between a great deal and a bust. Below, Commercial Consult shares some secrets to get you started!
Learn as Much as You Can
Before diving too deep into CRE, it’s important to understand that commercial properties are valued differently than residential ones. Square footage directly impacts the income you will make on a commercial property, and it will bring a more significant cash flow than a residential property.
Also, you will need to prepare for a longer lease and a bigger down payment. Most lenders expect at least 20% down, according to Amplify, so you must have the cash ready to go.
Make a Plan
Once you start to learn the ropes, get going on your plan of action. Ask yourself questions like:
- What kind of mortgage can I afford?
- How much do I need to make from the deal?
- How many tenants are currently paying rent?
- How many tenants will I need to find?
It’s best practice to put your plan on paper so that you can refer to it regularly and make any necessary modifications. Furthermore, you will need to set up a legal structure for your CRE business. Work with an online service to form an LLC, which will yield tax advantages and help protect you from liability. For example, when you work with the cheapest LLC filing service by BestLLCServices.com, all of your legal paperwork will be filed with the state for you.
Imagine Owning Before You Buy
To succeed as a CRE investor, you must know how to spot a good deal (and a bad one). First of all, you must have an exit strategy in place. If you know that you cannot walk away from a deal, it means that committing to the deal could cloud your judgment and lead to poor decisions down the road. Also, you must learn to think like a landowner. Always assess a property for necessary repairs and maintenance, and understand how to evaluate the risks. And, of course, you need to know how to gauge your potential profit.
Become Well-Versed in CRE Metrics
Lastly, there are several essential CRE metrics you will need to understand as you assess commercial properties. For example, calculate each property’s net operating income (NOI) by subtracting the first-year operating expenses from the gross operating income. Rocket Mortgage points out that the goal is for your NOI to be positive.
You will also want to learn how to find a property’s cap rate, which will tell you the estimated net present value of cash flow or future profit. And you’ll hear the term “cash on cash return” a lot as a CRE investor. The cash-on-cash formula works well for investors who use financing to buy properties because it allows you to compare the first-year performance of several properties.
A financing-dependent investor doesn’t have 100% cash on hand for purchasing the property, nor do they retain all the NOI (they use a portion to pay the mortgage). The cash-on-cash formula considers these factors. You can determine cash-on-cash by figuring out how much you initially invested or will need to invest to buy the property.
CRE could be a game-changer for your investment portfolio and open all kinds of doors for building wealth. But to make the most of your first few deals, you need to learn as much as you can about commercial properties and the strategies necessary to profit from them.
The information and advice above can help you get off to a strong start. But keep researching, work with professional services that can help you get your business put together, and find an experienced mentor who can help you execute your vision!
If you’re looking to sell your commercial property, let Commercial Consult help you through the process. Give us a call today at (949) 933-0488.