How to Invest in Commercial Real Estate
It’s no secret that commercial real estate is one of the best investment options available. In fact, Forbes mentions real estate as one of the best investments to make in 2019. That is likely because real estate is a key asset for life and business. And that means that no matter how the market trends, there will ultimately be a demand for real estate.
CRE investing can offer a significant payout. But as with any investment, the most important factor is time. Commercial real estate is not typically purchased to be flipped and immediately resold. Rather, it is an investment that proves profitable over several years’ worth of time. A CRE investor must select the type of property that they are willing to manage throughout the phases of the CRE market.
Research
An investor who is new to the idea of owning commercial real estate should take time to research all of the different commercial property types. There are four main CRE segments: retail, industrial, multi-family, and office. But, there are also several other sectors which include land, healthcare, leisure, etc. Each property type has a set of risks and benefits that may interest a specific kind of investor. Understanding the responsibilities that are associated with each may help narrow down the choices.
Just as there are differences in property types, there are also differences per market. An investor should research the population, growth, and demographics of a city before investing in a property there. They should also plan to visit the area before determining if that city is best for their investment. Meeting with a few local businesses could help the investor gain perspective on the market and upcoming developments planned for the area.
For the investor who plans to make a long-distance investment, a commercial real estate broker is the best relationship they can have. A good broker not only understands the local and national markets, but also plans a site visit to help determine if the investment is worthwhile. Brokers are an excellent asset in the entire investing process.
Understanding the Calculations
Of all of the details associated with investing in CRE, the financial intricacies are of the utmost importance. There are three major calculations every CRE investor should know. The capitalization rate, or “cap rate,” is the approximation of cash flow from the properties that produce income. Then, for investors who typically finance their CRE investments, there is the cash-on-cash analysis. This helps investors estimate the return they will earn from their investments. Finally, there is net operating income. This calculation allows investors to see how much income they will net after paying for operating expenses.
Financial Preparation
Commercial real estate loans are different from residential loans. For example, their rates are typically higher than traditional residential financing by 0.5 to 1%. Additionally, to receive a CRE loan, the borrower may need to disclose additional information to the lender. They may need to provide information like the amount of their downpayment, their credit score, length of time they have been open for business, etc.
To qualify for a CRE loan, the borrower will need to have a few additional items in place. First, they should calculate their net worth. This is the sum of the investor’s assets after subtracting their liabilities. A lender is usually looking for the borrower’s net worth to equal the full amount of the loan. Lenders will also check the borrower’s liquidity, which is the cash available for a down payment and/or for covering unforeseen expenses. They will also want to see proof of a borrower’s steady income.
Commercial real estate is an excellent investment choice. The time and preparation are worth the financial benefits that CRE can yield. With the right CRE broker and plan of action, commercial real estate can be a successful, long-term investment.
