What to Know Before Investing in Commercial Real Estate
Updated: Apr 15, 2019
You’re a savvy investor. You know your way around stocks, bonds, and mutual funds like the best financiers. Now, you’re looking at investing in real estate in the United States. But not just any real estate. You’re look at investing in commercial real estate.
Before you dive in, it’s important to understand commercial real estate and how it differs from other kinds of real estate investments. Here are a few things to know before you purchase in your first commercial property.
Know Your Markets
Before you invest a penny in real estate, you must know about where your money is going.
In particular, you need to be able to answer four important questions:
What are the major job drivers in the area?
What are the major centers of employment in the area?
Are there large supply additions projected to hit the market?
Is public transportation a factor (and proximity to public transportation)?
If you can answer these questions, you can answer other tertiary questions, like how stable the major centers of employment are, how likely they are to grow in the near future, and how this will impact the value of your investment.
The best way to go about this is a combination of data, research, and working with operating partners that have in-depth knowledge of the market.
Research Area Demographics, Market Trends, and Demand Impact
Once you know your market, you can move on to other important questions, such as the area demographics and trends.
Demographics are one of the main factors that influence a real estate market. This includes data describing the population’s composition, such as age, race, gender, average income, population growth over time, and patterns of migration.
It’s easy to overlook such factors, especially when you spend more time looking at a building than the neighborhood, but this information can significantly affect the health (or lack thereof) of a real estate market, particularly when it comes to how properties are priced and the demand for them.
You also need to be aware of market trends in your potential investment area. If you want the highest return on investment, you should buy a house in a neighborhood that’s in the early to mid stages of an upswing, so that the property shoots up in value.
All of this will have an impact on the demand for your commercial property—and, in turn, on your ROI.
Know How to Find Capital (and the Downsides of Leverage)
Finally, you should know how to find capital to invest in commercial real estate.
As a rule, commercial real estate investing requires one of two things:
Capital and a good deal.
Ideally, you should try to line up both, but reading the market will give you a sense of which to prioritize.
For example, if the market is flush with capital and you can find an attractive deal, focus on the deal. If, on the other hand, you’re worried about high valuations, you should focus on finding a steady source of capital.
However, you should also be aware of the downsides of leverage, which is when an investor borrows because they don’t have enough cash on hand to acquire an asset. While leverage (like mortgages) can increase the amount of property you can afford, savvy investors never take on debt without understanding (and being prepared to handle) the risks associated with it.
Ready to Invest in Commercial Real Estate?
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