Commercial real estate is about far more than aesthetics. A property might appeal to your senses, but it’s important to remember that real estate investing is a business. That means you should be paying careful attention to the main elements of the deal: the terms and the return on investment. Buying a property based upon aesthetics alone, or your “gut instinct” is a sure way to get underwater, and quickly.
You need to develop a business plan which outlines realistic goals over the one, three, five, and ten year marks. There are many resources for developing a plan for your real estate investment business, but mentorship is likely the best option—learn from someone who has already made the mistakes.
There is an old saying in real estate: a rental property yielding 1% its sale price per month is a good deal (I.E. if a property cost you $300,000 you should try get $3000 per month, in rent, or about 12% annual yield.) Learning and internalizing adages such as this (that you’ll likely learn from a mentor figure) will help you internalize many of the lessons you will learn (hopefully not first hand).
So, to get you in the right mindset about making commercial real estate investments, we’ve prepared a list of 10 considerations as you move forward into life as a commercial real estate investor.
1. Ask yourself the right questions, answer them honestly
These are the same line of questioning that should be asked with any financial venture. Understand what kinds of properties you’re looking for: location, purpose (for your own business, as a rental, as an equity vehicle?). Know how much time can you commit to the property and the management of it. Understand what specialized skills and knowledge you bring to the table and what skills and expertise you’ll need to contract for. What is your financial situation? Are you prepared to take on the risk of an investment of this size?
2. Learn some commercial investing vocabulary and where to find forecasting information
This site features a great deal of information to help you understand the concepts guiding the commercial real estate world. Terms like NOI (net operating income), Single, Double, and Triple-Net leases or concepts like real estate classifications will matter tremendously as you move forward. The Urban Land institute is a great place to find 2-3 year forecasts.
3. Learn from the best
There are tons of online resources for you, and we provide a number here between our helpful videos and blog posts, our investment property valuation calculator, and the local cap rate finder, we can get you set on the right path.
You also might consider joining a local real estate club or set up meetings and seek out networking opportunities with other investors and experts.
4. Visit and consider many properties and do your homework on each
Zoning issues will impact what you can and cannot do with your (potential) property. In addition, the changing demographics and property values in an area (gentrification article link) might impact the future prospects of a given property. The state of repair, new codes and regulations regarding accessibility and environmental considerations, the taxation burden, and of course, the income that the property currently generates should all be considerations.
5. Consider many sources for buying properties
Sources like Loopnet.com feature commercial properties and can be searched by location. There are also crowdsourced real estate deals going on, and you can also look into REITs (Real Estate Investment Trusts).
6. Find the experts you’ll need, find a good bank or mortgage broker, find a realtor
A good real estate investment strategy involves a team. We’ve already mentioned finding a mentor or an investment group. You will also want to make sure that you’ve located and vetted a mortgage broker that you get along with, and it would be smart to find an experienced realtor in the region who can give you the inside scoop.
7. Talk with other investors about local real estate
This is important. Network. Find people whom you can ask the hard questions of. You can find out who owns a property by finding your (or the property’s) county assessor, appraisal, or recorder’s office online. Generally, you’ll enter the property’s address or the Assessor’s Parcel Number (APN) in the property search section of the site. Look for who is running the most valuable properties and get to know them.
8. Figure out your financing and check your credit report
You can check your credit report once a year from the three major credit bureaus: TransUnion, Equifax, and Experian (they’ll charge for more than one, and only check your history). You can get your score from Credit Karma more easily. From there, you can consult with a bank or a mortgage lender. Generally you will need a credit score of 680+, a minimum cash down payment of 10%, and no recent bankruptcies, foreclosures, or tax liens to qualify for a commercial loan.
9. Make an offer (with your Lawyer’s approval)
Never sign any document before having your lawyer review and approve it. You’ll sign a letter of intent (LOI) about the property and all the contracts involved, the LOI is an outline of the basic terms of the transaction. It will be your lawyer’s duty to ensure that the LOI is not a binding agreement—in some cases things go wrong with the contract or process.
10. Due Diligence and Escrow
You must know all the little details about a property before money changes hands. Do your homework. Do homework on your homework. Before you sign the contract, make sure all the details are worked out. Money is about to change hands.
Order an ALTA (American Land Title Association) survey. This will show the property boundary lines, the location of the main building, secondary buildings, improvements to the property, and identification of easements.
An escrow officer will be needed to act as a neutral 3rd party to oversee the transaction.
You’ll then receive all of your escrow documents: bill of sale, sale and assignment of contracts, quitclaim deed, warranties, supplier guarantees, and the title affidavit and have a due diligence time period (as the buyer) to make sure all the documentation about the property stands up to review.
If anything doesn’t hold up to snuff, you have the right to tell the escrow officer to cancel the financial transaction.