16 Things Every Prospective Commercial Real Estate Investor Should Consider
Real estate is a highly competitive market, especially in the commercial sector. The work you put in is often what you get back, and it requires a lot of time, energy and persistence to make a name in the market.
One important tip is to ensure you’re choosing the right properties to invest in, so you’re not wasting your efforts and resources on the wrong opportunities. This requires some upfront research and knowledge about the commercial real estate space.
Below, 16 members of Forbes Real Estate Council shared some important things aspiring investors should consider before investing in commercial real estate.
1. Your Investment Priority
Are you looking for cash flow or appreciation? You can have both, but there needs to be a clear priority with the other one being the cherry on top. Appreciation is riskier, but you can make more money. Cash flow is generally safer and should pay distributions from day one. Make sure it’s an equity investment, not a debt investment. – Holly Williams, Keepmore.com
2. Proper Underwriting
The most important thing to consider is underwriting the asset or opportunity properly. Everyone involved with the transaction has to be on the same page with regard to the nuances of multiple assets and making profitability projections. The underwriter has to do meticulous work and that requires quality, accurate data. Having the infrastructure to get and process clean data is crucial. – Jeff Cline, SVN | SFR Capital Fund I, LP
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3. Market Factors
One thing investors should consider before investing in commercial real estate is important market factors. Crucial market factors, such as supply and demand, population growth, population age and employment are necessary to be aware of. – Scott Meyers, Kingdom Storage Holdings
4. Whether They Want To Be Passive Or Active
Decide if you want to be a passive or an active investor. Active investors are the landlords dealing with the toilets, termites and tenants. Are you ready to commit to the time and headaches? Passive investors place their money alongside an expert sponsor who manages the project for them. Most people don’t know there is a passive option for real estate investing. – Kent Ritter, Birge and Held
5. Your Vision For Your Real Estate Portfolio
Before investing in commercial real estate, start by reflecting on your own investing goals. Are you investing for cash flow, appreciation, tax advantages or a hybrid of all three? What’s your ultimate vision for your real estate portfolio? Once you determine your own investing goals, you can weigh the pros and cons to see if commercial real estate is the best path to help you reach your goals. – Annie Dickerson, Goodegg Investments
6. Your Asset Diversification
If you are investing actively, do you have enough assets to be diversified? Getting one or two commercial properties is very risky as commercial properties can be very specific to a certain kind of tenant. For commercial real estate in this period of rapidly changing preferences and needs, there are a lot of risks best borne by huge institutions. – Rayan Rafay, Fraction
7. Millennial Migration To Inner Suburbs
There is continued migration to vibrant inner suburbs. Millennials in particular want and need more affordable housing and more space. We’re seeing a lot of value in “build to rent” communities that offer tenants the benefits of a single-family home combined with the amenities of a professionally managed apartment community. – Ian Formigle, CrowdStreet
8. Realistic Capital Upgrade Estimates
Investors should be realistic in estimating capital upgrade needs as competition for quality space users is especially fierce and exacerbated by the pandemic. To be competitive and remain so in the market, one has to continually upgrade newly acquired properties that may have been neglected. Caveat emptor! – Charles Argianas, Argianas & Associates, Inc.
9. Risk Versus Return
Like any other asset class, your investment in commercial real estate will carry risk congruent with a return. There are few, if any, ways to separate that relationship. As attractive as the return may be, caution and patience are more valuable in the long run than a short-term return with long-term tail risk. – Clark Twiddy, Twiddy & Company
10. Local Market Trends
Nationwide trends are one thing and local market drivers are another. Understand who the office tenants, retailers and luxury renters are and understand how that base will evolve with time. – Aaron Galvin, Luxury Living Chicago Realty
11. Potential Property Tax Increases
Consider the impact of property tax increases after the sale. It seems elementary but this increased expense burden is often overlooked. Even in non-disclosure states, it’s not uncommon for property values to double or triple subsequent to the sale. What do the tenant’s leases say about expense recovery? Are there caps or annual limits? What if you have few or no tenants to absorb the cost? Hello slippage. – Ronnie Miranda, NewQuest Properties
12. The Long-Term Results
Yes, there are properties that can turn around a faster profit but awareness of the long-term investment is important for success in purchasing commercial property. Do not always focus on the immediate profits. Focus on the long term benefits of purchasing the asset. – Galit Ventura-Rozen, Commercial Professionals, Inc
13. Rental Potential
Who will rent the space? More people are working from home and companies are still not seeing production falter. Commercial space may be an area that companies will look to save money on by not renting space or at least renting a space not as large as before for their employees. – Nancy Wallace- Laabs, Profitable Landlord System
14. Your Own Management Abilities
The first thing to consider is whether you have the management abilities needed to run a commercial property. The next thing is whether you have the capital to cover yourself in case of hiccups such as vacancy and other major occurrences. The return may be outstanding until it isn’t. Plan for the downside, build or go in with reserves. – Michael J. Polk, Polk Properties / Matrix Properties
15. Your Working Capital Reserves
In addition to acquisition costs, you need to consider potential capital improvements, major repairs, vacancy risk, tenant improvement allowance, maintenance expenses and more. All this often equates to five- or six-figure cash reserves minimum. Unlike residential, a few thousand dollars and a home warranty policy won’t be sufficient to mitigate the potential risk. – Catherine Kuo, Elite Homes | Christie’s International Real Estate
16. Your Current Knowledge Of Commercial Real Estate
Transitioning into commercial real estate requires education. They are financed differently, evaluated differently and require a good number of different components in order to be successful. Even if you have owned 100 single-family homes as an investor, this doesn’t make you a good commercial real estate investor. There are too many moving parts and too many areas that will trip you up. Learn first. – Amy Tiemann, TM1 Properties