Many real estate investors start with residential properties, build a portfolio of residential properties and then look to investing in commercial real estate. The reason for this is that they are more familiar with this market, being home owners themselves and feeling that it is a safer investment and easier to manage. Whether I have just described you or you want to start with commercial real estate, there are a number of things that you should think about before you get started.
Commercial real estate is often defined as when you need to obtain commercial financing. This would be for any property that is zoned for commercial use and for residential properties that have 5 or more units. The commercial real estate financing comes with a higher down payment and higher interest rate. With the added financing costs, you will get a cheaper per unit cost as you buy more total units. Also, the time commitment to manage a 5 unit property versus a 10 unit property is not significant.
Get educated on the area you will invest and find traditional local cap rates and net operating incomes. Think outside of the box, you may be comfortable and familiar with residential apartments, however you may find it more lucrative, rewarding and complementary to invest in office buildings, retail, industrial, mobile home parks, land, etc. Find an agent that has many connections and talk to others you know with commercial investments. Commercial properties are often sold without even being listed, so knowing the right people can introduce you to a larger available inventory. A deal partner or private lender may be needed on larger deals and can be the difference between an fair investment and a great one.
Know what you are getting into. Commercial deals can take much longer than a residential deal, so don’t rush it or get inpatient. The money wagered for the due diligence of a commercial property (inspection, appraisal, environmental, etc.) can cost $5,000 – $10,000 more or less, and this may be money lost if you decide it is a bad deal. Having a great real estate agent, can mean you know the costs and risk of ownership, and he/she can get you in touch with many people that can answer an array of questions. You want to know the cost of trash collection for the building, environmental considerations, and development and zoning zones in the area and future plans, etc.
If you are, were or want to be a commercial real estate investor or are in the industry, please comment or get in touch with me. Contact me anytime, I am here to help.