Investing in commercial real estate can have great rewards, but with great rewards comes great risk if you're not prepared. Understand your options before you take any leaps of faith.
Often, real estate investors begin in a familiar place—with the purchase of a single-family residence. Buying and then flipping a house, or simply renting it out, is certainly one way to profit from the real estate market, and in many ways it may seem like the easiest—after all, a single-family house is something that most all of us have some experience with, as opposed to, say, an industrial warehouse facility, or an office complex.
With that said, investing in commercial real estate can prove advantageous in many regards. This is especially true if you follow a few guidelines—including a few tried-and-true investment tips that just might surprise you.
Thinking Big
Here is one unconventional investment tip that may come as something of a surprise. A lot of real estate investment novices believe the prudent move is to start small—by investing in an apartment complex with five units, maybe. The reality is that this is not necessarily the best course of action—that in fact, the more units you buy, the less you will pay for each one of them. As such, many investment pros would readily tell you that investing in a building with at least ten units is advisable.
Weighing Your Options
Another point that the novice investor may not realize: Commercial real estate is a term that encompasses much more than just apartment complexes. There are a lot of different properties out there, and you should not select apartments just as a default. Instead, you might look closely at some of the alternatives—office spaces, land, warehouses, and even retail shopping centers. These options all come with pros and cons, but you should not limit yourself to apartments only, without at least thinking about the other avenues available to you.
Going it Alone
The would-be commercial real estate investor might also remember that there is no rule saying they have to go it alone—and in fact, it might be much more prudent to find an investment partner. A lot of the real estate investment properties out there are well over the million dollar threshold. For many, this is simply not feasible, not without a partner to put up some cash or credit. (Naturally, it is imperative that you get to know your partner before signing on any dotted lines, and that you ensure you are working with someone you can trust.)
Losing Money
Something else to think long and hard about: You should be prepared to lose some money on a commercial real estate deal, at least at first. As with a smaller-scale real estate transaction, you will pay a “due diligence” fee, then have a period of time in which you can make appraisals and inspections. You absolutely should make these evaluations, but you should also be aware of the fact that, in some cases, you may decide that you do not want the place—and you will be out of that due diligence money. You will also, of course, be out the money you spend on the appraisals and inspections. This could add up to a substantial amount, but it is always better to walk away from a bad deal, take a modest loss, and move on, than to buy something you know to be inferior.
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