Investing in commercial real estate (CRE) can be a valuable wealth creation tool, but it is equally intimidating and confusing for new investors. The stakes here are very high, and the errors are expensive. Then, how do new investors position themselves for success? This guide offers a look at key tips for those starting out in the CRE investing market, supported by real-world examples and statistics.
Start with Education and Research
The first step in commercial real estate investing is to educate yourself and conduct thorough research. Knowledge truly is power in CRE, and lack of it is one of the top reasons new investors stumble. Skipping due diligence can turn a “great deal” into a financial nightmare.
Real-world examples abound of why this matters. Consider the investors who rushed into booming markets without studying local conditions; some ended up overpaying for properties in declining neighborhoods or with hidden structural issues because they didn’t ask the right questions.
Choose the Right Asset Class
Commercial real estate is not a single uniform market since it comprises many types of assets, such as office space, retail space, industrial property, apartments, hotels and hospitality spaces and others. Every type of asset comes with its own unique profile, featuring varying levels of risk and return. The same applies to overall marketplace behavior.
If you are looking for stable, long-term income, then apartments or essential retail might be a suitable option. Seeking higher yields and don’t mind more volatility? Possibly some of the niche sectors, such as hotels or value-add office deals. Research every part of the sector, as an example, office and retail are hit hardest by economic cycles and trends. Meanwhile, industrial warehouses and multifamily housing tend to have more stable demand.
Leverage Partnerships and Mentorship
Commercial real estate is considered to be a relationship-driven business, which is good news, as beginner investors do not have to navigate it alone. One of the best moves you can make is to form a relationship with partners and or mentors. Partners, experienced investors, joining an investment group and or a mentor can go a long way. A mentor or partner can help provide better deals through the analysis of opportunities and mistakes as well as offer expertise in financing or management experience.
For beginners, there are plenty of options. You might partner with a more experienced investor on a small deal, for example, bringing some capital or sweat equity to a veteran’s apartment acquisition to learn the ropes, splitting the profits. You could also join local real estate investment clubs and participate in group investments, where an expert syndicator leads the deal and newcomers invest passively.
Run the Numbers Carefully
Within commercial property investment, numbers reveal the true nature of investment. Smart investors do their thinking, living or dying in spreadsheet form and beginners should adopt this habit themselves. Always base your decisions and thinking on finance, not on gut instinct or enthusiastic avenues. This means that we need to analyze a property’s income, expenses, costs of financing and the potential cash flow of the property under the lens of reasonable assumptions thoroughly.
Some important statistics to become familiar with include cash flow, capitalization rate (which you find by taking net operating income divided by purchase price paid for the property), cash-on-cash return and the debt-service coverage ratio, which indicates whether the income will be sufficient to pay loans comfortably. Pay attention to properties that exhibit established cash flow and debt that withstands reasonable assumptions.
Think Long Term and Diversify
The broader focus on commercial real estate investing is that it is generally a long-term endeavor; therefore, beginner investors should adopt a long-term perspective. Unlike trading stocks, commercial real estate often requires an investment that takes years to pay off completely. Having a longer-term view means looking for reliable cash-generating properties that tend toward generating a more gradual increase, compared to quick flips or returns.
With a long-term outlook also goes diversification. Remember that as a new player in the real estate investment game, you don’t want everything in only one property or market. Diversification can range from splitting up your investment across various property types, various geographic locations or even real estate investment trusts, in addition to property that you own personally. The logic is that other types of properties and different locations will experience increases and declines at various times.
Building Your Hard Asset Empire
Getting started in commercial real estate is a lot of work and requires learning as well as a little humility. If you incorporate the tips we’ve provided for you as well as educate yourself, select a solid asset type focus, leverage the experience of partners, focus on the numbers while maintaining a long-term and diversified mindset, you will avoid most of the common pitfalls beginners fall into and be in a position to succeed. It will be a learning experience and the rewards can be substantial for those who stay committed to the game.
If you are looking to dive deeper into successful CRE strategies and continue building your knowledge base, you should read “Hard Assets and Hard Money for Hard Times”, which provides a complete wealth-building blueprint through commercial real estate investments. With the right information and mindset, even a total novice can enter the complex world of CRE and begin building a successful future.
