Commercial real estate investing is not something that should be embarked upon before some thorough research is done. Real estate investments can result in some real financial growth; however, there are important rules to know before jumping in the water.
The first thing to keep in mind when deciding to become involved in commercial real estate investing is that commercial property is not valued the same as residential property is. Usable square footage is the reason. The value of a commercial property is dependent upon the amount of its square footage that will bring in cash flow. Speaking of cash flow, a commercial real estate owner will see a bigger, more consistent income from their investment than will the owner of a single family home occupied by a renter. In addition, a lease on commercial property is typically longer than one on a residential property. And, when negotiating on a commercial building or multi-family property, banks and investment mortgage lenders love it when the potential buyer comes in with at least 30% cash down. All of this will put a buyer on the A list right from the get-go!
Among the loans offered by real estate investment lenders are loans referred to as hard money loans for real estate investors. A hard money loan is based on the borrower’s assets. The funds they receive are usually insured by their own real property which must have equity of between 30% and 50%. This provides a high rate of protection for the lender. A hard money loan is, most often, offered through a private company or private investor. This type of loan will start with an interest rate of between 15% and 18%, and sometimes higher, which is more than a typical commercial real estate lender would charge. A private loan such as this can only come with a duration of no more than five years, while a traditional loan will offer a duration of anywhere from one year to 20 years. All this having been said, taking out a hard money loan for commercial real estate investing purposes must be done with the assurance by the borrower that their new property will provide the ROI they need to pay the loan in the allotted time.
Commercial property investing automatically poses some key questions to the perspective buyer. First and foremost, a price point has to be realized. It goes without saying that a buyer needs to set goals within their own abilities to pay. And, after crunching the numbers, what kind of ROI can the buyer expect? If purchasing a commercial or multi-family property, how much space is currently occupied, and are the tenants already occupying the property consistently paying their rent? Answers to these questions are essential to secure before a deal is made.
In searching around for a good, reasonably secure deal, there are certain things to look for. Is the property of interest in need of repair? How much repair is needed, how extensive is it, and how much could it end up costing? A calculator is an important tool to bring along when hunting for a good investment property. It often becomes the searching investor’s new best friend. It is important to look at a property with a discerning eye, and to be able to tell a good investment from a potential money pit. Basically, to know when to walk away. Success in that case is not being sucked into a financial abyss that the new owner cannot even unload on their worst enemy!
Commercial real estate investing includes certain key phrases that the potential investor needs to learn before stepping out. For instance, Net Operating Income, or NOI, when all is said and done, needs to be in the positive. This is found by subtracting the operating expenses from the operating income. The Cap, or, Capitalization, Rate is used to figure out what the value is of an income producing property, like office buildings or strip malls.
When it comes right down to it, the obvious fact is that commercial real estate investing is an education. It needs to be learned first before jumping out into the field for the lessons that can only be learned hands-on. Or, sometimes, in hand-to-hand combat!