Are you thinking about taking the plunge and investing in your first commercial real-estate deal?
Even if you’re a veteran investor in residential properties – someone who buys single-family homes to rent, for example, or a house flipper – you’ll need to learn the ropes when it comes to commercial investments.
Here are five tips for first-time CRE investors:
1. Knowledge is power. Don’t rush into a deal. Do your due diligence ahead of time. Make sure you’re knowledgeable about not only the property you’re considering but about the market in general.
2. It’s all about the numbers. Sure, location matters, just as is does for residential real estate, but the success of any commercial deal is dependent on whether the numbers work. And, to understand the numbers, you need to know the lingo – intimately. Make sure you understand the formulas for NOI, cap rates and other applicable finance terms. There’s no excuse for not understanding these crucial principles.
3. Consider all sectors. Many new investors plan to start with small apartment buildings, but multifamily may not present the best upside potential in your particular market. So, consider alternatives, such as retail, net leased properties or even self-storage.
4. Think about financing upfront. Commercial loans require a lot of paperwork. It’s helpful to establish a relationship with a lender in advance and to familiarize yourself with the application requirements.
5. Surround yourself with professionals you can trust – a commercial broker, real-estate attorney, accountant, insurance agent and general contractor.