All savvy real estate professionals are aware of commercial real estate investment potential. Additional cash flow, higher returns, immense asset appreciation, beneficial economies of scale, relatively open playing field – the reasons why CRE is a better deal than residential real estate are plenty. However, with such a lucrative endeavor come more responsibilities. As most would expect, CRE investing is a bit different from purchasing single-family properties. There are a lot more numbers to crunch and a lot more capital to raise. And that requires proper dedication. For this reason, investors must exercise due diligence, take time to ferret out the process, and know what to expect. Here are some essential steps to achieve a profitable commercial real estate deal.
1 Know why you’re investing
Why do you want to invest in the first place? What are you hoping to gain? Before you start browsing for that perfect piece of property to purchase, ask yourself these crucial questions. You need to know your “why” before choosing the “what”. In other words, you need your starting point to keep you on the right track. That’s the first and crucial part of getting the best CRE deal possible. Otherwise, your investment’s pretty much pointless.
2 Weigh all your options
CRE encompasses a wide variety of property types. In general, any land, large residential rental, or other building used for business purposes to generate income is called commercial property. Typical examples are shopping centers and storefronts, industrial properties, condominium buildings, residential housing, medical buildings, etc. For this reason, it’s essential that investors pick the type of property that they are comfortable managing – especially if this is their first time investing in commercial real estate.
3 Learn what the insiders know
To be a player in the commercial real estate business and find a profitable real estate deal, you must learn to think like a pro. Commercial deals differ in many ways from their residential counterparts. They’re a lot more complex, require more research and money, take more time to evaluate, and have higher stakes. However, unlike residential leases, commercial real estate leases last much longer, the cash flow and return rates are higher, the tenants are more qualified, and the property value is more easily increased. Finally, the tighter your credit environment, the more experienced your commercial mortgage broker should be. Thanks to their expansive network of banks, credit unions, hard money lenders, and debt fund lenders, you will be able to get the best terms and rates for your commercial project – which brings us to our next point.
4 Make sure to partner up with the right people
To get the most bang for your buck, you need a team by your side, not a one-man army. This means you will need some outside help. For starters, you need someone to show you all the properties with the best potential. Mind that some of these properties may not even be on the market. Besides a reputable realtor, you should consult an experienced attorney and accountant who will ensure that you’re prepared for your taxes and that your transactions are legal. Thirdly, consider partnering with established contractors who have a good reputation, know your industry, and are responsive to your needs. Finally, find at least one commercial mortgage broker to help you with financing.
5 Map out a plan of action
Now that you’ve built a sprawling network and have all the right people in your corner, it’s time to set parameters. For instance, do the math for how much you’ll be able to afford to pay and then get rate quotes from multiple mortgage lenders to get a sense of the amount you’ll pay over the life of the mortgage. Mortgage calculators are great tools for developing reasonable estimates of the total cost of your commercial property. But there are more key questions you need to ask yourself. For instance, how much you expect to make on the deal, how much rental space you need to fill, how many tenants are in the picture, and such.
6 Learn how to recognize a good deal
By this time, you should already have clear investment goals and the type of property in mind. Now, what’s left is to learn how to recognize a good and profitable commercial real estate deal. The top real estate pros have that figured out. But what’s their secret? Above all, it’s essential to have an exit strategy. In case of a significant change in market conditions, a non-performing investment, an unprofitable business, et cetera, it’s good to know you can walk away from that deal. If you have a sharp landowner’s eye, that can significantly help you. It would mean that you know how to assess risks and property damage that requires repairs and determine whether or not the property meets your financial goals.
7 Find the perfect property
While searching for the best deals, make sure to be adaptable. Use the internet, read the classified ads, and enlist real estate bird dogs to help you find valuable investment leads. Also, don’t limit your search to that one city. For example, if you want to invest in CA, research the best cities in CA to invest in real estate, and list all great areas in the state that you might want to consider. Then, go there, and do some neighborhood “farming”: study the neighborhood, go to open houses, talk to the neighbors, look for vacancies, et cetera.
8 Estimate a property’s performance
Got it? Don’t move on to the next stage without making sure that the property benefits your portfolio. At this point, it helps to know the key CRE metrics when assessing real estate, including Net Operating Income (NOI), Cap Rate, and the Cash-on-Cash formula. Does the property fit your plan, goals, and needs? What are the risks? Does the risk outweigh your rewards?
9 Look for motivated sellers
Just like with any other business, the customer is the one who drives real estate. And it is your task to find them – especially those ready and willing to sell below market value. The thing is – nothing can happen, and nothing will matter until you’ve found a deal, which is usually accompanied by a motivated seller. If your seller is not motivated, meaning they don’t have a pressing reason to sell below market value, they won’t be as willing to negotiate.
Everything looking good? Close the deal
Commercial real estate can be incredibly valuable, especially if you want to diversify your portfolio quickly. Indeed, the process will, no doubt, be daunting, but that’s why you’re doing your research. In the end, getting the most profitable commercial real estate deal isn’t just about farming neighborhoods, negotiating a fantastic price, or sending out smoke signals to lead sellers to your doorstep. Rather, it’s about basic human communication, building a strong and sprawling network, and good rapport with property owners. This way, they’ll be much more comfortable and eager to do business with you.