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Preparing to Invest in Commercial Real Estate

Posted by Lance Langenhoven on July 17, 2014
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This economy means most people are looking for ways to invest their money to protect it from inflation and give them something to rely on in the future. However, this economy also means most people are squeamish when it comes to the very prospect of putting their money anywhere but the seemingly safe bank. Fortunately, there are still some viable investment options out there other than taking the risks that come with buying stocks. One especially notable example is commercial real estate.

The Benefits of Commercial Real Estate

You may still not be convinced that commercial real estate is the right place to put your hard-earned money. No one could blame you for being so cautious. However, there are a few things to consider when it comes to commercial real estate.

First, it’s a unique industry in that its customers are a collection of diverse businesses. If a certain industry was falling apart because it was running out of customers, that would be one thing. However, commercial real estate didn’t suffer from the recession like other industries did. For that reason, it’s also recovered differently and was never at risk of going away completely. Commercial real estate will always be necessary and because it will be necessary to so many industries, it never relies on one single one to thrive.

Second, for reasons just mentioned, commercial real estate may be one of the few American industries still attracting foreign investors. Relative to a number of other options available to the international community, commercial real estate here in the US looks like a pretty favorable vehicle. This means prices should continue to go up.

Third, commercial real estate had a great year in 2013. Key indicators like overall transactions, asset prices and capital availability were all on the rise and 2014 hasn’t given any reason to think these will slow down soon.

In fact, as far as asset prices are concerned, they’ve been near 2007 heights and transaction activity has increased in the secondary markets too.

Now, let’s take a look at what you need to know before investing in this lucrative market.

Residential and Commercial Real Estate Are Completely Different

This is an important element to grasp. Many people get into commercial real estate after some success in the residential arena. It can definitely be a beneficial place to start. However, if you don’t realize that you’re in a whole new industry, you’re bound to make some costly mistakes.

For example, the two types of properties are valued completely differently. With commercial real estate, you’re looking at income as it relates to usable square footage. You should also be looking to use your commercial properties to lease to as many companies as possible as this will give you greater cash flow. Leasing a commercial property usually comes with a longer contract too. If you don’t understand this and end up locking a company into a one-year contract (standard for residential properties), you’ll be losing all kinds of cash flow.

Lastly, if you’re financing the company renting your space, you should expect a much greater down payment. This is especially true if you’re dealing with an environment where credit is tighter. Then you can confidently ask for as much as 30% down before letting them in the door.

Consider the Help of a Brokerage

If you’ve never invested in residential real estate before or a lot of the advice in the last section left you with more questions than answers, you should think about investing in commercial real estate through a brokerage. They’ve become increasingly popular over the years as investors have seen the market increase in value, but don’t want to take on an increased amount of risk by entering it.

There are many advantages to doing business with a brokerage. For one, it will mean a much smaller investment on your part, because other parties will be involved. This will also lessen your profit, but you’re facing far less risk now too.

Secondly, they’ll most likely understand the market better than you will. Even if you think you have a good grasp on investing in commercial real estate, unless you’re familiar with the local market, you’ll have quite the climb ahead of you.

So while they may have some investment opportunities simply waiting for your capital, they’ll probably also have an idea of where motivated sellers have properties. This type of information is invaluable as it means getting profitable real estate at a better price.

Lastly, a brokerage may have an excellent idea of the market simply because they own other properties in it. This is another invaluable tool. If they own a couple buildings in a certain neighborhood, they’ll have a pretty good idea of what to charge tenants and how to bargain to get more properties.

Individuals who are ready to invest their money should consider commercial real estate. This option carries many benefits with it, but you may be best served if you allow a real estate brokerage to handle matters for you.

Sources:

http://www.investopedia.com/articles/mortgages-real-estate/09/tips-commercial-real-estate.asp

http://www.creonline.com/real-estate-investing-types.html

http://www.deloitte.com/view/en_US/us/Industries/Real-Estate/8c8e46bbd422a310VgnVCM3000003456f70aRCRD.htm

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