Commercial real estate is not always at the forefront of the minds of new real estate investors. This is in part due to the notion that commercial real estate is only owned by large corporations. Although those types of properties are certainly out there, not all of them are. So, is commercial investing right for you? Read on to learn how you can be a part of this sector of the real estate market and what you should try to avoid.
Understand Your Market
Much like you would do for residential properties, researching the market for commercial properties is also recommended. However, instead of researching the demand for family homes, you are now researching for job growth in the area. Experienced realtors will tell you that in terms of commercial real estate, it’s going to require much more homework than residential properties to become successful in this area of real estate. Other than job growth, you must also ask yourself other questions regarding your area. Things such as proximity to transit and centers of employment can also be factors that you can impact the value of properties.
Be Capitalized Properly
The reality is that being capitalized properly can either make or break a deal. Those who are properly set can see themselves being successful that much more often. The simple truth is that real estate operators are incentives to keep the capitalization of a deal as low as possible to enable a maximum return. It is true that keeping capitalization as low as possible does increase return; it also increases your transaction risk. A good example of this is when an operator plans to use capital funds to upgrade or renovate sections of a unit and plans to pay for future renovations with the money flow coming in from those renovations. The risk you take may come to bite you when renovation costs skyrocket, and delays occur, thus leaving your property vacated for longer than you were anticipating it to. This, of course, leaves you with no cash flow to invest in future renovations that may have helped you increase your revenue.