Commercial real estate investment is a particularly lucrative industry that offers the opportunity to build wealth. With the vast range of commercial property types, there are significant options and possibilities to choose from. Investing in commercial real estate can also be complex, but there are several steps that can make the process clearer.
What is commercial real estate?
In simple terms, commercial real estate is land or buildings purchased or leased specifically for business purposes. Commercial real estate investment involves the purchase of buildings or land for development or to utilize for operating business. This includes retail ventures, office buildings, warehouses, hotels, and more.
Types of commercial real estate
In order to have the most success in commercial real estate investment, you need to know the variety of commercial properties that exist. There are several different types of commercial real estate, and they can be grouped as the following:
- Special Purpose
It is important to understand these different categories as you consider your own business, financial goals, and where it may make the most sense to invest.
Why should I invest in commercial real estate?
The broad range of purposes for commercial real estate comes with many benefits. First, commercial real estate typically generates a higher potential return on investment than residential, as it has the possibility to pay for itself. Commercial real estate investment has the possibility to generate revenue, no matter what type of property you choose to invest in. This makes the chance of profit much higher.
Additionally, if you purchase a building that you will lease to other businesses, you can offer longer leases, which allows for a lower vacancy risk. Longer leases prevent a high turnover rate and consequently cause a relatively consistent cash flow.
Another significant benefit of commercial real estate investment is the different types of competition for commercial investments. Because of the barriers that come with commercial real estate investment, competition is often lower in the commercial market.
Finally, commercial real estate investment offers the incredible chance to create business-to-business relationships. These relationships can expand your network and your investment portfolio.
How to get started
If you’re interested in investing, it is important to learn what to do first. Commercial real estate investment can be a tricky process, but when done correctly, it presents a great business opportunity. Here are five basic steps to get you on the right track:
- Educate yourself- This is the most important step of commercial real estate investment. Once you understand the basics of commercial real estate investment, learn the differences between residential and commercial real estate and do your research on types of property.
- Analyze comparables- The second step is to analyze comparables and research other developments. This includes the prices of similar properties nearby that recently sold. Make sure to use the right success metric when analyzing other sales.
- Learn financial tools- Underwriting and reserving costs are two vital tools. The ability to underwrite a deal and accurately estimate the costs of certain aspects is necessary in the commercial real estate investment process. It is equally important to reserve cost contingencies, which means setting aside funds for unexpected costs. These expenses can occur even before your property has established a stable cash flow, so it is crucial to reserve these funds.
- Build your team- One of the biggest mistakes many commercial investors make is working alone. Even though it might appear cheaper to work solo, it is likely that you are losing time and money by doing so. Build a team of experts (a commercial broker, lender, attorney and title company) that aligns with your service and trust them with the jobs you hire them for. With support, you will be able to make better decisions as a well-informed team.
- Find the right title and escrow agency- With all the details that come with real estate transactions, it is vital to work with a highly knowledgeable and experienced title and escrow agency that understands the complexities of commercial real estate investment transactions. Working with a company, like Landmark Title, can help overcome complications that may surface or hinder a business transaction. An agency can ensure a commercial real estate closing to go as smoothly as possible.
Working alone is one of the biggest mistakes commercial real estate investors make, but it certainly is not the only one. Other mistakes include improper valuations, financial ignorance, and neglecting due diligence. Commercial real estate investment is unique and requires a significant amount of attention. Extensive knowledge is necessary to learn the financial intricacies of commercial investing. These mistakes can be avoided by working on a team and taking the time to learn about valuation.
If you’re interested in learning more about commercial real estate investment or other related topics, Landmark Title Assurance Agency can help. Our team of seasoned professionals are experts in title and escrow and can help you navigate highly complex transactions. Contact us to have a knowledgeable member of our team answer any questions you may have about the transaction or title process.