In my previous article, ways to spread investment risk, I mentioned about almost all possible investment options. What I didn’t mention were – Peer-to-peer lending and direct investment in commercial real estate. Recently I got an offer to be one of the partners in a local investment trust. One of the existing partners is a close friend of ours.
His argument was, investing in commercial real estate provides a very substantial option to other investments and this is a great way to spread out a portfolio. Indeed, the commercial real estate market possesses tremendous potential to generate return on investment and multiply wealth.
Investment in commercial real estate requires a considerable amount of patience and mental preparedness as well as the right outlook. It does not only revolve around buying and closing a deal but more so it involves reselling, repairing, restoring and remodeling.
The reason why I went in to peer-to-peer lending instead of this commercial real estate opportunity is the nature of passivity. I am earning almost 8% from investment in Prosper lending with spending only 5 mins per month on it.
Where as, in real estate investment, one should spend long hours of research, nurture business relationships and one must be able to take critical investment decisions on time. Also, bear in mind that the most secure way to set out on commercial real estate investing would be to start on a moderate scale and then slowly go for higher investments.
Remember, I am not talking about passive real estate investing, like REITs or buying limited liability partnership shares here, I am talking about buying properties in locality and renting it out to commercial establishments.
In case one of you are considering investing directly in to commercial real estate arena, this article is for you, based on what I learned from my friend and doing some feasibility study over net and talking to other people.
20 Tips for Commercial Real Estate Investment
1) From the start, make it clear to yourself that you are an investor and certainly not a ludicrous accumulator of commercial properties. Remember that the concept of establishing commercial real estate investments is to generate abundant profit. So, if you do not produce any profit when you resale, then that only means to say that you only possessed a property and did not invest.
2) Find out if you and the commercial properties are completely and personally protected prior to purchasing. This is to protect you from any lawsuit.
3) Accept that commercial real estate deals do not really provide you handsome profits overnight. These properties are commonly a bit difficult to sell but once they have great attraction, they can bring greater rewards. So, be patient and do not rush in making unfavorable decisions.
4) Carefully study all property types and pick your own corner based upon your comfort zone and whatever shall aid you obtain your profit objectives without much hassle.
5) Always remember that there is a learning curve whenever you experience spending more of your time in concluding a particular deal. Things will for sure fall into place once you perform exceptionally well.
6) Make sure to keep more contacts in your network who understand what you are searching for to buy or sell.
7) It is important for you to consider reserving more seed money since the initial down payments are generally of a greater percentage as compared to family house loans.
8) Devote more time in determining deal partners or private lenders to back you up. These may provide the credit or money necessary to buy high value commercial property and you may allot with an agreed percentage of the earnings from the sale.
9) Only work with expert real estate agents, an well-experienced professional who can answer questions which may arise while assessing commercial properties or purchasing them, shall help you immensely. Make sure that you also understand all the regulations and laws in force in your state and city.
10) In this type of business venture, it is best to think long-term; that is, you must be ready to hold properties with a minimum of ten years.
11) Be practical and ask yourself important questions like what’s your time worth? Prior to putting your money down, carefully ponder about how much work you’re prepared to do and how much you’ll contract out work.
12) Of course, you have to learn and understand by heart the tax codes.
13) Aim attention at one investment type at a time. This is primarily valuable when you’re first starting out; you must concentrate on one type of investment such as land, apartments, retail, offices etc.
14) Think about environmental issues such harmful waste problems. Take note that property owners have the main responsibility for repairing such problems, although the present property owner didn’t actually cause them.
15) Consider getting a mentor so you can acquire ideas from his/her mistakes and for you to understand the whole thing that revolves around in commercial real estate venture.
16) If you’re in a partnership deal, see to it to fund your deal with a non-recourse loan. Non-recourse discloses that you are not personally guaranteeing the loan; that is, it enables you to be withdrawn from the loan in case the partnership went sour and, in case the property did not succeed, it won’t be obligated to you personally.
17) Understand that each property comes with a lifetime. In short, every building needs repair and restoration, so see to it that you secure a long-term plan to manage such repairs.
18) You must know how to recognize an excellent deal. The most exceptional deals are the ones you can easily walk away from.
19) Your top priority should be to set parameters so you must master how to map out a plan of effective action.
20) The most practical strategy to assess and determine a commercial property is to review the neighborhood it’s in, by searching for vacancies, making conversations with neighborhood owners and going to open houses.
In case you are interested in starting your own business, instead of renting out the space, do look out for loan providers who can not only lend you money but also help your business grow, like OPEN from American Express, Restaurant loans from ironwood finance, etc.
Some additional tips on commercial real estate deals are helpful also you might not want to miss out on this gigantic post on 100 ways to make money by real estate investing.
For me, I want to first start with investing in rental property which is meant for personal usage. If I can handle that then I may consider venturing out in to commercial real estate investment.
Readers, if you’re a commercial real estate investor, do share your experience with us.
Jack @ Enwealthen says
I would add to make sure you have a good team of advisors to help – lawyer, tax accountant, perhaps a real estate agent.
Buying commercial real estate means you’re starting to swim with the sharks, so you want to make sure you have your chain mail underwear handy…
Anton Ivanov says
Thanks for sharing – great tips. They are very much inline with what I would recommend a residential real estate investor as well. The bottom line is that research really pays off, since you make most of your money going into an investment property.
Bruce Willis says
The tips are really great that you have covered here in this topic. I can really use these tips to help myself in the future investment opportunities. Keep Writing. Cheers!
Good comment about swimming with sharks, though in the UK there are some excellent firms of chartered surveyors who will guide you through the purchase process and then manage your property on your behalf
John Haver says
“His argument was, investing in commercial real estate provides a very substantial option to other investments and this is a great way to spread out a portfolio.” I can’t think of a truer statement.
A lot of people think investing in limited liability partnership shares constitutes as investing in commercial real estate. But like you said the purpose is to generate abundant profit, not to just barely get a return on your investment.
Kevin at GraduatingFromDebt.com says
Thanks for the great practical post! These are very useful points for commercial real estate investors before they invest anywhere. The list can be a check list for commercial real estate investors. Cheers!