When real estate investors get started, they typically start with single-family homes because it’s familiar. However, at some point, many of them start looking into CRE investment. If you are new to the real estate game or you want to advance to the next level, here are 10 tips you should know before beginning your CRE investment journey.
If you have to get commercial financing anyway, why settle for a 5-unit apartment? Why not go for a 10-unit? Keep in mind that the more units you buy, the less you will pay per unit.
Take it Slow
A commercial deal takes more time than a single-family home deal. This isn’t a bad thing, but you must keep this in mind, so you don’t rush into a bad decision or lose your patience. You should think of a commercial deal as a bonus- not a way to create quick cash.
Consider More than Just Apartments
Since most investors are comfortable with residential property, when they venture into CRE investment, they tend to only look at apartments. While there’s nothing wrong with this, you should consider other options as well, such as mobile home parks, office buildings, etc. Take the time to consider your options and choose your niche based on what will get you to your goals.
Be Ready to Spend A Lot of Time in the Beginning
If you have not made your first deal yet or if you’re spending more time on one deal than you ever have before, don’t get discouraged. Houses are so much alike, it’s easy to use a cookie-cutter system to buy/sell them. However, commercial properties are so much different. There is a learning curve, so it will take you more time at first- but eventually, you will get faster.
Take the Time to Learn New Formulas
When you buy houses, you use particular formulas, such as buying at 75% after repaired value, minus repairs. However, the formulas with commercial properties are different. You will have things like Cap Rates and Net Operating Income.
Relationships are Critical
While it’s true that it’s important to form relationships with private lenders and other investors when buying/selling houses, it’s more important when you’re involved in CRE investment.
After all, a property that costs $1 million or more isn’t likely within your financial means alone, so you will probably have to work with partners. Additionally, many times these properties are sold before they’re listed- so the more you discuss with others what you’re looking for, the more deals you’ll find.
Get Financing in Advance
A commercial loan is different than a residential loan. Typically, the down payment is a higher percentage than a loan on a single-family home. Therefore, you’ll have to put more down. However, if the deal goes south, there’s no personal liability. That being said, make sure that you ask around and find the best lenders in your area before you start making offers.
Be Prepared to Lose Due Diligence Money
Once the offer is accepted, you will be given a chance to do your due diligence. This will include your property inspection, appraisal, and other tests/inspections as required. The issue is, commercial due diligence costs more than residential. You may spend $5,000+ on a deal only to learn it’s not worth it after all.
Get a Partner
As we mentioned previously, most people can’t buy $1 million on their own- so you’ll want to spend some time finding a private lender or partner that can help you. A partner can provide the cash/credit you need to purchase the property. Then, you can compensate them by paying a percentage of the cash flow/proceeds from the sale or a fixed interest rate.
Know Where to Go with Questions
Finally, you must network with people experienced in the world of CRE investment. They can answer any questions you have.
Following these tips does not guarantee instant success in the world of CRE investment, but it does help you gain perspective about investing in commercial property that will get you started right. If you’re ready to start your journey with CRE investment, call the professionals at Commercial One Group. We will be happy to help!