The opportunity to own property is seen by many as a rite of passage — and it’s even better when it can make you money. That’s where commercial real estate investing often comes in. The U.S. construction market was worth approximately $1,162 billion in 2016, meaning that there’s really no shortage of commercial buildings in which to invest. But if you’re new to the world of real estate investing, there are lots of missteps you’ll want to avoid. Below, we’ve put together a few tips for first-time investors to help you embark on this new (and potentially profitable) journey.
1. Don’t Borrow Too Much
Overly enthusiastic investors may be tempted to invest in properties they can’t really afford. You might assume you can simply borrow enough to cover the costs, but over-leveraging a property will not turn out well. First of all, lenders be unlikely to grant you, a first-timer, 100% of the funds you need. Even if they trusted you with that much financing, it wouldn’t really allow you to break even on the investment. Ultimately, it’s way better to choose a property that’s actually financially feasible and can bring in a profit, rather than relying on borrowing everything and struggling to actually bring in an income.
2. Understand the Market and the Area
You can’t expect to dive into commercial real estate investing without doing your homework. Otherwise, you’re setting yourself up for failure. You’ll want to become familiar with the demographics and trends in the areas on which you’re focusing, as well as essential components of commercial real estate, such as rental agreements, vacancies, and other legalities. This information will allow you to make informed decisions without buyer’s remorse.
3. Choose Your Property Wisely
There are all different kinds of commercial properties in which you could invest. As a first-timer, it’s best to focus on only one type at the onset of your journey. You might look at office buildings or apartment complexes, for example. Or you might be intrigued by shopping and retail centers or medical facilities. You could also focus on hotels, warehouses, industrial property, or even farmland. Don’t try to dabble in more than one property type at this point. Do your research and decide which type you’re most passionate about and that will be most likely to bring in a profit.
You’ll also need to determine what you intend to do with this property. You might decide that you’d rather fix up properties and flip them instead of finding tenants. If that’s the case, keep in mind that the costs of rehab could be higher than you’d think. Commercial buildings accounted for nearly 35.9% of the total flooring market in 2016, so you’ll need to be realistic about the costs you’re willing to take on — and find out whether they’ll actually have a good ROI — if you go this route.
4. Find a Mentor
You don’t have to find everything out the hard way. It’ll be to your benefit to find a mentor — someone who’s been involved in commercial real estate investing for quite some time and has found success in this field. Not only can this person teach you a lot about investing and keep you from making mistakes, but they can also connect you with others in the industry (like contractors, accountants, suppliers, and others). This can allow you to form a trusted team for future projects, which is a must for any serious commercial real estate investor.
5. Have an Exit Strategy
This might not be pleasant to think about, but it’s always important to be prepared. Ultimately, your goal is to make as much profit from this property as you can. Sometimes, getting out is actually the best way to do that. You’ll need to assess how you can obtain the most money from the property, regardless of whether things go the way you originally intended or not.
Most experts say you should have anywhere from three to six exit strategies (and sometimes more) in place. These can include both short-term and long-term strategies. At the minimum, you’ll need to decide how long you plan to hold onto the property and what you intend to do with it when it’s time to sell. The more prepared you are to fail, the more likely it is you’ll be able to get a better profit out of the situation.
Overall, you should never decide to invest in commercial real estate on a spur-of-the-moment basis. It takes a lot of time and effort to really make a go of it. Make sure to surround yourself with knowledgeable and experienced professionals in the field, conduct ample research, stick to a budget, and make informed decisions to increase your chances of a successful investment.