Purchasing commercial real estate is one of the wisest investments you can make; it has shown reliable growth over the decades, even during economic downturns. As it’s meant to be a long-term financial strategy, holding onto your property long enough can assure you build equity, which you can access for later gain.
However, commercial real estate investments are not a get-rich-quick scheme, and many new investors struggle to find their footing if they don’t carefully investigate every facet of the industry. Consider the crucial guidance in this article before you make any financial decision, as prudence will help assure your success.
Selecting Your Specialty
Commercial real estate isn’t one field but a selection of smaller, interconnected specialties, all of which have their benefits. Here are just a few options, with their pros and cons.
- Long-Term Residential Rentals: Renting to families for housing can guarantee good income, but it has a lower profit margin than other real estate, and you must pick good tenants to protect your investment.
- Short-Term Vacation Rentals: Vacation rentals can make a lot of money per night, especially in attractive areas, but it depends on trends and seasonal traffic to a given area. If you use sites like Airbnb, you are subject to their own market fluctuations.
- Office Space: Commercial spaces tend to have more steady tenancy and a good profit margin, but this isn’t always the case. Recent shocks to the corporate system have proven that this area, too, is subject to trends.
- Retail Space: Whether a strip mall or a single boutique, there’s a lot of customization here in what types of businesses you might welcome. However, location is crucial if your tenant relies on foot traffic.
Many investors start with one property type and expand as they get more comfortable.
Accessing Funding for Commercial Real Estate
You’re very unlikely to buy your first property outright because, like a private residence, it is a major cost. Thankfully, you have numerous financing options available to you, each with their drawbacks and benefits.
- Conventional Loan: This is essentially the same type of loan you would use to buy a personal home. You have a lot of choices in the market, but you need to have great credit and undergo a lengthy financial process.
- Business Line of Credit: This is similar to a business credit card in that it allows you to borrow and reuse the funding available to you as necessary. There are higher limits and lower interest rates than a credit card, but they don’t have a set repayment schedule and higher interest rates than a term loan.
Once you’ve purchased your first property, you can seek other, more specialized funding. Debt Service Coverage Ratio (DSCR) loans rely on the profit potential of the property rather than your own finances, which makes the application process faster, but most lenders want to see a history of real estate success first before approving you. They’re available throughout the country; for example, you can get a DSCR loan in West Virginia and 37 other states so that you can develop your portfolio across the country.
Choosing a Location for Your Commercial Real Estate
Location is truly everything when it comes to commercial real estate. Keep these considerations in mind as you begin to look.
- Know the Market Well: You must be highly familiar with the market’s fluctuations, best locations, and economic prospects. This is why many people buy real estate in their neighborhood before expanding.
- Consider Long-Term Success: Real estate is typically held for decades or more, so it’s not just about what the numbers show today but what the area’s projected growth is far in the future. To understand whether this will be a good deal, look at official research about population growth, economic expectations, and pending legislation.
- Look at Street Level: Once you have decided on a market, you need to get more precise. This is especially true for office and retail space because being even one street over can make a huge difference in your tenants’ success. Compare vacancy rates, market rents, crime rates, and foot traffic.
- Inspect the Property: Don’t let yourself fall in love with a potential investment before you’re sure that it’s going to be a good fit. Look at the numbers first before you visit; you can run the Debt Service Coverage Ratio calculations just as a DSCR lender would to identify the profit margin. Only when you’ve decided that the property is good on paper should you head off to look. Always get any potential purchase professionally appraised and inspected before you sign any paperwork.
Conclusion: Success Requires Planning
Factors such as property specialty, funding, and location must be foremost when deciding to dip your toe into real estate. Your first property helps to set the stage for later investments, as it provides you valuable experience in the potential pitfalls and intricacies of building a portfolio. Once you’re familiar with how real estate works, you can start adding more investments and building a healthy income through prudent financial decisions.