How To Invest In Commercial Real Estate

Want to learn about how to invest in commercial real estate? Investing in commercial real estate is not as easy as you may think, but with proper training and experience it can be very lucrative and rewarding. Commercial real estate involves many aspects and the perfect deal can be accomplished with due diligence and patience. Rushing into a quick deal without checking out the entire scope of the transaction just may cause a loss of funds and livelihood. This article will give step-by-step instructions on how to invest in commercial real estate.

What Type of Properties are Considered Commercial Real Estate?

Before contemplating investing in commercial real estate, it is necessary to understand the type of properties that are involved. Commercial real estate involves four different types:

  • Apartments – 5 or more
  • Retail
  • Office
  • Industrial

These four types of commercial real estate properties would include: hotels, warehouses, office buildings, malls, garages, farm land and apartment complexes of five apartments or more. Learning how to invest in one of these properties will involve many steps.

  1. Training to Invest in Commercial Real Estate. It would be very foolish to contemplate investing hundreds of thousands of dollars without proper knowledge and know-how. This learning can be accomplished by studying the market, working with a mentor, joining a real estate investment group or taking online investing courses in commercial real estate.
  2. Due Diligence in the Purchasing of Commercial Real Estate. After gaining knowledge and training, the investor is ready to delve into the business of commercial real estate investing. Due diligence means to thoroughly check out all potential properties. This would include: title reports to check all liens on the property, net sheets to look at net profits from the investment, searching the neighborhood for nuisance, inquiring as to the reason the building is being sold, and financing. Some properties may look attractive in the beginning, but one of the first questions that should be asked is why the building is being sold. If the commercial property  is such a good rental investment, why is there a need to sell? The reason the property is being sold is used to negotiate the selling price. Sad to say many people are losing their properties due to miscalculations in expected rents vs. the interest rate on the loan. Many sellers took out adjustable rate loans, only to find out that the loans adjusted quickly and caused the positive cash flow situation to dissolve.
  3. Calculating Expected Return on the Investment. Every investor must look at the return of the money invested compared to the rents expected in the venture. Knowing how to figure out the expected return is also necessary. Besides the monthly mortgage payment there are other expenses to consider such as: taxes, insurance, maintenance, management, repairs, utilities, gardening and expenses to re-rent the empty units when a vacancy occurs. Investors should not contemplate a commercial property that produces less than a 10% return on the money invested. It is also important to allow a 15% vacancy allowance and the overall average has been estimated at 20% with a turnover generally within 36 months. The lender will allow for a 25% vacancy allowance when financing the property.
  4. Support of a Seasoned Realtor in Purchasing Investment Properties. There are good deals and there are bad realtors. The best deal in the world can go sour with the greed of an unethical agent. It is imperative to hire a seasoned realtor to aid you in the purchase of any commercial real estate. This will involve huge amounts of money from the closing costs to the down payment. The realtor or broker will need to have past experience in "closing" this type of transaction. Many realtors can present an offer, but not all realtors can actually find the financing and close the deal.
  5. Financing Commercial Real Estate Properties. The final part of the equation for investing in commercial real estate is to have the all desired "perfect financing." Before purchasing any property, check for the best rates and deals. The interest rate may not be the ultimate test, but the costs and points involved will be.  It is sometimes better to pay a slightly higher interest rate to save thousands of dollars in points.
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