There are few investments as enticing and complex as commercial real estate. By investing in commercial real estate, you can enjoy various benefits, including increased income, appreciation in value, and diversification.
However, there are also a variety of costs involved in buying commercial real estate that can lead to undesirable outcomes if you’re not careful.
It’s essential to understand the differences between residential and commercial investments when considering purchasing commercial real estate. This is your first step into making better decisions when entering commercial real estate investment.
However, there are also a variety of costs involved in buying commercial real estate that can lead to undesirable outcomes if you’re not careful.
It’s essential to understand the differences between residential and commercial investments when considering purchasing commercial real estate. This is your first step into making better decisions when entering commercial real estate investment.
Step 1: Research First, Buying Second
It’s easy to hop online and start looking at properties you may want to purchase. However, before you start investing in commercial real estate property, begin investing in your commercial real estate knowledge.
The best way to make sure your purchases maximize their value is to buy the right type of commercial real estate.
It’s easy to hop online and start looking at properties you may want to purchase. However, before you start investing in commercial real estate property, begin investing in your commercial real estate knowledge.
The best way to make sure your purchases maximize their value is to buy the right type of commercial real estate.
What Types of Commercial Real Estate are there?
Commercial real estate can be broken down into several types, each with its own pros and cons:
Apartment/ Multi-Family
This type of investment is used for rental operations. This can be a great investment for those looking to have a steady income and cash flow and diversify their portfolio.
Office
If you’re looking to run a business from your commercial property, look into purchasing office space or converting an existing property into office space. You will often find higher returns on investment with office buildings than the other types of commercial real estate.
Retail
This type of property is best suited for people looking to generate sales revenue from their investment. Investors should look at retail properties carefully as retail sales tend to fluctuate more than expected.
Industrial
If you’re looking for a place where your business can expand, consider industrial space. Industrial properties will often give you a higher ROI when compared to other commercial spaces but can be trickier to operate because of their specialized needs.
Hotels / Hospitality
If you’re looking to invest in a place where you can generate sales from the rooms, consider investing in a hotel. This also allows for consistent cash flow but can be more expensive to operate than other commercial spaces.
Commercial Land
Sometimes, it makes more sense to purchase land for a commercial project instead of a property. This can be done when you have a specific vision for the future and need the flexibility to design commercial real estate.
Commercial real estate can be broken down into several types, each with its own pros and cons:
Apartment/ Multi-Family
This type of investment is used for rental operations. This can be a great investment for those looking to have a steady income and cash flow and diversify their portfolio.
Office
If you’re looking to run a business from your commercial property, look into purchasing office space or converting an existing property into office space. You will often find higher returns on investment with office buildings than the other types of commercial real estate.
Retail
This type of property is best suited for people looking to generate sales revenue from their investment. Investors should look at retail properties carefully as retail sales tend to fluctuate more than expected.
Industrial
If you’re looking for a place where your business can expand, consider industrial space. Industrial properties will often give you a higher ROI when compared to other commercial spaces but can be trickier to operate because of their specialized needs.
Hotels / Hospitality
If you’re looking to invest in a place where you can generate sales from the rooms, consider investing in a hotel. This also allows for consistent cash flow but can be more expensive to operate than other commercial spaces.
Commercial Land
Sometimes, it makes more sense to purchase land for a commercial project instead of a property. This can be done when you have a specific vision for the future and need the flexibility to design commercial real estate.
Pick & Master Your Type of Commercial Real Estate
Once you know what types of commercial real estate options exist, your next step is to choose one and become an expert. By narrowing down your choices, you will better understand the types of properties to look for when purchasing commercial real estate.
Not only are there various types of properties to invest in, but there are also different investment strategies that can help you boost your return on investment.
1. Land Banking and Development
Land banking refers to purchasing undeveloped land to build commercial real estate on it in the future. This gives you a lot of flexibility when looking into your investment.
Sometimes, people start this strategy by picking up an inexpensive property while they’re still getting their feet wet in commercial real estate investments. They can later sell it for a higher price once it’s easier to build on.
2. Fix and Flips
This strategy allows you to purchase, fix up, and resell a property. This is an excellent way for you to learn how to run a commercial property and earn money.
3. Operating Businesses from Commercial Real Estate
This strategy involves purchasing a property that will allow you to operate your business from it. If you can make it work, this could be an ideal way for you to invest in commercial real estate.
4. Value-Add Investing
This strategy is best for building up equity in your properties. You’ll want to purchase a property that you think has upside market value and then fix it using sweat equity (DIY).
With so many ways to invest in commercial property, it is vital to learn how to quickly weed out bad options to find that golden property that will boost your ROI significantly.
Experienced investors conquer the market with the knowledge they gain from underwriting.
Once you know what types of commercial real estate options exist, your next step is to choose one and become an expert. By narrowing down your choices, you will better understand the types of properties to look for when purchasing commercial real estate.
Not only are there various types of properties to invest in, but there are also different investment strategies that can help you boost your return on investment.
1. Land Banking and Development
Land banking refers to purchasing undeveloped land to build commercial real estate on it in the future. This gives you a lot of flexibility when looking into your investment.
Sometimes, people start this strategy by picking up an inexpensive property while they’re still getting their feet wet in commercial real estate investments. They can later sell it for a higher price once it’s easier to build on.
2. Fix and Flips
This strategy allows you to purchase, fix up, and resell a property. This is an excellent way for you to learn how to run a commercial property and earn money.
3. Operating Businesses from Commercial Real Estate
This strategy involves purchasing a property that will allow you to operate your business from it. If you can make it work, this could be an ideal way for you to invest in commercial real estate.
4. Value-Add Investing
This strategy is best for building up equity in your properties. You’ll want to purchase a property that you think has upside market value and then fix it using sweat equity (DIY).
With so many ways to invest in commercial property, it is vital to learn how to quickly weed out bad options to find that golden property that will boost your ROI significantly.
Experienced investors conquer the market with the knowledge they gain from underwriting.
Step 2: Do The Math – Underwriting 101
Now that you know what commercial real estate options are available for you to invest in, it’s time to look into the numbers. Understanding how properties work will allow you to make your decision more quickly.
Underwriting is a way for you to determine if a property is worth your investment. It involves looking at three numbers: the cap rate, the cash flow, and the net proceeds.
Now that you know what commercial real estate options are available for you to invest in, it’s time to look into the numbers. Understanding how properties work will allow you to make your decision more quickly.
Underwriting is a way for you to determine if a property is worth your investment. It involves looking at three numbers: the cap rate, the cash flow, and the net proceeds.
How Underwriting Works
First, you’ll want to do the cap rate analysis. This involves taking your property’s income per year and dividing it by the amount you paid for it.
The cash flow analysis requires you to look at how much you spend on a property per year and compare it to how much money you make from it. If the numbers are close, then it’s worth further consideration.
Finally, you’ll want to look at the net proceeds of the property. Net proceeds look at how much money will be left over after paying closing costs, expenses, and other fees.
If you can look at these numbers and they all point in the positive direction, then it’s time to move on to step three.
First, you’ll want to do the cap rate analysis. This involves taking your property’s income per year and dividing it by the amount you paid for it.
The cash flow analysis requires you to look at how much you spend on a property per year and compare it to how much money you make from it. If the numbers are close, then it’s worth further consideration.
Finally, you’ll want to look at the net proceeds of the property. Net proceeds look at how much money will be left over after paying closing costs, expenses, and other fees.
If you can look at these numbers and they all point in the positive direction, then it’s time to move on to step three.