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Lee Weyland, CCIM, partner with Weyland Ventures
While there are countless reality TV shows and publications touting the payoff of flipping houses, it’s commercial property that can really take a savvy investor to the next level. Investing in commercial real estate can be an excellent strategy to generate a reliable income stream for not only you today, but also for the benefit of future generations.
“The conventional investment community considers real estate to be an alternative investment, which is the same classification as art or wine collections,” said Lee Weyland, CCIM, partner with Weyland Ventures. “I believe real estate should be a core part of any individual’s asset allocation strategy for long-term wealth generation.”
Commercial real estate is a unique industry that requires specialized expertise, so don’t jump in without a plan. Whether you’ve been successful with residential properties, or you’re brand new to real estate, here are some tips that will help your first foray into commercial investing be a success.
Do Your Homework
Andrew Holden, CCIM, Executive Vice President at Commonwealth Bank and Trust
When considering whether to purchase a piece of commercial property, it is imperative to do your homework, said Weyland.
There are many considerations when assessing the value of a real estate deal. In addition to reviewing the physical condition of the property itself, including the age of critical building systems like HVAC, check into any zoning or deed restrictions on how the property can be used.
Understand the surrounding market, including demographics, vacancy rates, traffic patterns and comparative rental rates, added W. Andrew Holden, CCIM, Executive Vice President at Commonwealth Bank and Trust. Also, make reasonable assumptions about project costs, including acquisition, financing and renovations, as well as expected rental rates and expenses.
Tyler Smith, CCIM, Executive Vice President for PRG Commercial Property Advisors
“For example, if market rates are $18 per square foot for comparable properties, your analysis should not assume a rental rate of $22 per square foot unless there is data to support it,” Holden said.
Location, Location, Location
Location will often determine value of an asset, said Tyler Smith, CCIM, Executive Vice President for PRG Commercial Property Advisors. “Better located properties can yield higher rents, which in return drives value upward.”
Creating value through location also is determined by a property’s highest and best use, he added. Once you analyze the current highest and best use of a property, make sure you also understand how that can change with the market and economy. “This is key for long-term investing and realizing tremendous upside through appreciation and the possibility of redevelopment.”
Know Your Numbers
Angela Marshall, CPA, MBA, CCIM, Consulting Principal with MCM CPAs & Advisors
Make sure you have a basic understanding of accounting principles before you make your first commercial investment, said Angela Marshall, CPA, MBA, CCIM, Consulting Principal with MCM CPAs & Advisors.
“Be able to effectively read a balance sheet and P&L statement, and appreciate the difference between net operating income and net cash flow,” she said. They each offer different financial snapshots of your portfolio.
For example, net operating income is calculated by rental income minus expenses, which may include vacancies, property management fees, maintenance, insurance, and interest on the property loans. Cash flow is calculated by taking rental income and subtracting loan payments and expenses.
Speaking of leverage, while it’s an important component of investment real estate, according to Holden, don’t get in over your head. “Avoid excessive leverage so that you have the ability to pivot in a challenging economic environment. Pivoting could include selling the property, repositioning it for a different use or refinancing.”
It’s OK to Start Small
There is a misperception that it takes a lot of capital to get started in commercial real estate, said Weyland. “While it certainly helps, there are strategies to get started small.”
You don’t actually have to buy a property to become a commercial investor. You can start by purchasing stock in a publicly traded real estate investment trust (REIT). This is a simple and relatively safe way for small investors to add a diversified investment of real estate to their portfolio.
Make Sure the Time is Right
While investing in commercial real estate can be very lucrative, their excellent return on investment (ROI) brings a certain amount of risk, said Smith. The greatest risk lies in the timing of a deal. In fact, timing is even more important than location.
Commercial real estate investing is driven by economic and industry cycles. When to buy, hold or sell at key points during a cycle is determined by many factors that are specific to each investor. The recent recession demonstrated how timing can ultimately control an investment. Make sure you’re aware of the state of current markets and the overall economy before you make any deal, Smith said.
Who’s on Your Team
Your success in commercial real estate investing may ultimately come down to who you surround yourself with, said Smith. Choose experts in their fields who can advise on various aspects on investing, specifically those who have earned a CCIM designation. Real estate brokers, bankers, accountants, attorneys and other professionals with this designation, Certified Commercial Investment Member, are recognized as leading experts on commercial real estate.
Commercial brokers can help you navigate all aspects of commercial investing, as well as recommend other trusted advisors for specific concerns. An experienced banker can help you with financing, and a real estate attorney can help protect your assets. An architect specializing in your chosen asset class (office, retail or industrial) can help determine the soundness of a structure, and a general contractor can help you determine costs associated with building improvements and deferred maintenance.
With the help of a team of experts, the right timing and a solid plan, commercial real estate investing could pave the way to your financial success. For more tips about commercial investing or to connect with a CCIM professional, visit kyccim.org.