If you’re new to investing, you’ve come to the right place! Investing in general can be a nerve wracking and daunting new venture, but it shouldn’t have to be. In fact, investing in commercial real estate has shown to be a promising investment venture during both the ups and downs of the market cycle.
But before you jump into investing in the first property that comes your way, you might want to do your research first. Here at myNOI we’ve compiled a list of 3 tips you need to know from commercial real estate experts, FortuneBuilders and 42Floors, that will help give you a better understanding of how to begin investing in commercial real estate.
Tip #1: Do Your Homework
We’ve said it before and we’ll say it again, do your homework! Doing your homework is pivotal, in any business venture and it’s even more important when investing in commercial real estate for the first time. This not only means knowing all you need to know about the property in question (location, size, etc.), but this also means understanding the market you’re trying to invest in.
Understanding how commercial real estate differs from residential real estate and knowing the basic lingo is a great starting point. Commercial real estate and residential real estate actually differ quite a bit, for instance; commercial real estate is valued differently than residential properties. Valuing commercial real estate is determined by the income it generates vs. residential real estate, which is typically valued by its sq footage, cost of construction, or floor plans, etc.
It’s important to know your basics, so learning a few of the basic commercial real estate terms will insure that you have the basic knowledge needed to get you started.
Here are just a few basic terms you should know when you’re first starting out:
- Capitalization Rate (Cap Rate): is a calculation that measures the relationship between the value (price) and amount of income a particular property delivers or the rate of return based on the income that the property is expected to generate.
- Net Operating Income (NOI): is the number that provides investors with a general idea of how much they’ll make from an investment minus all of their necessary operating expenses.
- Triple Net Lease (NNN): this is a lease agreement that states that the tenant is responsible for all the costs relating to the property being leased, in addition to the rental fee of the property.
Tip #2: Consult an Expert
There’s no shame in reaching out to others in the field who have more experience and knowledge about investing in commercial real estate. Investing in commercial real estate can be a challenging and complex process, so consulting someone who knows the market and has years of experience can really give you the upper-hand when you’re just starting out. Reach out to those in the community and pick their brains, ask them questions and most importantly build those connections.
Tip #3: Understand Your Metrics
As important as knowing what a Cap Rate is or what a Net Operating Income is, understanding how to calculate them and how to interpret them is just as important. The cap rate, once again gives investors an idea of future profits or cash flow. Understanding the average cap rate in your area is essential to making the right decision when it comes to investing in any type of property.
Here at myNOI, we calculate cap rates all the time, if you need help calculating a cap rate, we can can do that for you!
Simply text CAPRATE to 41411 to receive the current market cap rate in your interested area. Or fill out our quick and easy cap rate request form.
Another important metric to understand is your Net Operating Income (NOI), being able to calculate and understand your net operating income will help give you a general idea of what you can expect in terms of operating expenses and your potential annual income.
There’s so much more to learn when it comes to investing and that’s why we here at myNOI provide weekly blog postings with training, educational resources, and webinars to help guide you along your commercial real estate path. To keep up to date with our new blog postings and the commercial real estate tools we have to offer, become a myNOI member or subscribe below!
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Dalesmy Gonzalez is a graduate of Western Washington University where she studied Business Administration with an emphasis in Marketing.
She specializes in optimizing digital marketing websites for commercial real estate brokers and connecting buyers, sellers, and investors across the US.