- Office space (Class A, B, C)
- Retail stores
- Hotels & Motels
- Industrial facilities (Light & Heavy)
- Multi-family residential complexes (5+ units)
- Multi-use or special purpose buildings
A few simple tips will help you to make the most practical and profitable decisions when beginning your commercial property investment efforts. Here are five suggestions for managing your initial investments in the commercial real estate field.
Perform Your Due Diligence
Before beginning any investment plan, it is a good idea to research the available properties in your area and consider the degree of risk you are willing to accept. This will provide a framework for beginning your investment process and ensuring that you achieve the desired results. Analyzing the price points and associated costs for properties will give you a basis for comparison on the options available to you.
Know the Basic Formulas
A few formulas are used to determine the value and revenue-generating potential of commercial properties:
- Net operating income is a calculation that totals up all expected revenues and subtracts the operating costs for a specific property to determine the profitability. This helps determine the estimated income you will generate from an investment in a commercial property.
- The capitalization rate, also known as the cap rate, is the formula used to determine the value of income-producing commercial properties. This formula consists of a ratio comparing the net operating income with the property asset value.
- Cash-on-cash metrics provide a predicted rate of return for CRE investments. This is essentially a calculation of the expected return on investment for your property.
Avoid Common Mistakes
Some of the most common mistakes made in initial commercial property investments include the following:
- Failing to perform accurate valuations or the necessary research on properties you are considering
- Overestimating your tolerance for risk
- Performing minimal or no due diligence on the commercial properties in which you invest
- Failing to consider all of your options for funding your investments
Look Into Alternative Funding Options
Researching all your potential funding sources will allow you to make the most cost-effective and practical choice for your real estate lending needs. Alternative lenders can often provide added flexibility and increased access to the funding you need to pursue your goals in the commercial property marketplace.
