Today, the majority of real estate investors start with purchasing a single-family home and renting it out. And let’s face it, it’s probably well within their comfort zone.
If you’re ready to step out of your comfort zone and start adding more valuable commercial properties to your portfolio, here are some tips to help you succeed.
Take a Deep Breath and Take Your Time
The average commercial deals you will run into simply have more moving parts than residential deals. They not only take longer to purchase, but they also take longer to sell (and renovate). But this isn’t necessarily a bad thing; just keep it in mind.
Start by Thinking Big
If you are looking, for example, at a 10-unit apartment building, you are likely to be required to get commercial financing from your bank. It’s more of a hassle, so why not sweeten the deal and find a 50-unit opportunity? The more apartment units in a deal, the lower the per-unit price.
Or Ditch Apartments Entirely
We’re not saying there is anything necessarily wrong with investing in apartment complexes. Consider your comfort zone again – is it steering you to residential apartments because it’s familiar? Why not expand your horizon and find other types of commercial investments, including industrial, office buildings, shopping malls, land, etc.? Keep your options open and choose your niche carefully.
Be Prepared to Spend a Lot of Time at First
Resist your temptation to become discouraged when you haven’t closed your first deal right away. You will find that commercial real estate is a different animal than residential, and things just take longer. Just keep in mind you are on a learning curve, and analysis and offers will go faster when you have more experience.
Learn the new formulas
If you have been buying residential properties, you probably have used methods to analyze your properties. Commercial properties also have formulas like Cap Rates and Operating Income. Take the time to learn what constitutes a good deal in your area.
In a Connected World Relationships Are Even More Important
Establishing and maintaining relationships with other investors, bank officers, and private lenders are more important than ever when you first venture into commercial real estate.
Let’s face it – solid relationships are what can make or break you when you are looking at multi-million dollar deals. Also, many commercial properties are sold without being listed, so keeping your ear to the ground with your contacts can be the key to your acquisition efforts.
Find Good Financing in Advance
As we said earlier, commercial real estate loans are a different beast than residential loans. Still, there is some light at the end of the tunnel; consider, for example, there is often no personal liability if the deal crashes and burns. Also, there is more flexibility about financing the down payment.
That being said, take the time to ascertain who the best lenders are in your area and get to know them BEFORE you start making offers. It may very well make the difference between success and failure in your first few deals.
In the end, there is no guarantee of success no matter how prepared you are. However, keeping these tips in mind will help you get started and should serve you well over time.