Be careful to follow these 5 tips when you source, qualify, and acquire your first piece of commercial property so that it's not your last!
1. Research Your Market: Remember, 80% of your commercial property's performance will be market based. This means that you should have growth in jobs, demand for office and industrial space, household population growth, and increased demand for retail services and housing. If your market is trending the other direction, beware because the other 20% of the equation, your financials, may not equate to profits.
2. Identify Your Return Requirements: Pick your return requirement. Does the deal need to provide you with a cash on cash return (i.e., you invest $1,000,000 and want $100,000 back year after year)?
Or perhaps you want an overall internal rate of return that accounts for how long you hold the property and how much you sell it for? Some people target 12-30% for their yield on investment or their internal rate of return. And remember, just because a commercial investment has a good cap rate, doesn't make it a good deal.
Note: Your cap rate only tells you the first 12 months of the investment's potential story!
3. Identify Your Ideal Property Type: Commercial investments come in 4 types: Retail, Office, Industrial, and Multifamily. Which commercial investment type is right for you? Research the differences between them and you'll see that they all offer distinctive advantages and disadvantages when it comes to management, cash flows, hedging against inflation, maintenance, and growth in the real estate cycle.
4. Qualify the Seller and the Property: You think you're in the real estate investing business, but you're really in the people who own real estate business. Remember, too many people focus just on the property and not enough on the people who own the properties. These folks are the ones with the problems you can solve by buying their commercial property and providing them with a solution that offers you the opportunity for upside value and big profits.
You can make changes to the property now you that understand its position in the market and how to unlock its highest and best use (value) from Step #1.
5. Acquire the Property -- Make Sure You Understand Your Loan: Make sure you read your loan documents. They will be different than when you bought your home and traded those residential investments. Banks make commercial loans and know the tricks to maximize their returns while minimizing their risks when lending you money on your first commercial real estate purchase. Most commercial loans have a loan term, which means that the payments may be calculated on a 20 to 30 year amortization period, most banks want you to either pay off the loan via refinance or sale within 5-10 years.
Many first time commercial real estate investors miss this step and unfortunately discover later in their holding people that they haven't planned for a term maturity. They have to scramble to save their equity and their first building!
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