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Breaking Into Commercial Real Estate Investing

By: Elite Lagacy Education, May 11, 2017

 

Most real estate investors start with residential units. We understand that it may seem daunting to invest in a huge office building, skyscraper, factory, warehouse or some other massive property. But that’s no reason to overlook this lucrative industry. Here we will provide an introduction to familiarize you with commercial real estate investing. There are definitely lots of rewards to be had by the savvy investor.

 

What defines commercial real estate investing?

 

Commercial real estate typically involves buying properties that are then leased out to other businesses. The primary purpose of these properties is for businessesto operate out of them. Essentially, it represents a workspace rather than a place to live. This includes everything from retail storefronts, offices, warehouses, hotels and more.

 

While it can be tempting to go after big name businesses, sometimes small to medium-sized businesses are the best tenants because their leases may be longer. Since they generally have smaller financial reserves, you won’t see small to medium-sized businesses move around as much as larger corporations. Essentially this offers you stability in your investment – an investor’s dream.

 

Benefits of commercial real estate.

 

Investing in commercial property has some unique benefits compared to other types of real estate deals. Consider the following.

 

  • Significantly larger cash flow. Given the higher rental prices of a larger property, you will experience significantly higher cash flows. Also, lease durations are typically longer.
  • Economies of scale. Assuming you lease space to multiple businesses, there are scale economies to be had as an investor. It’s much easier to service each of your tenants when they operate out of a single location. Typically, the larger number of tenants can also work in your favor when securing more favorable deals with contractors.
  • Large pool of property managers. Not only is there a large pool of these companies, but many of them are reliable. Sometimes with residential investing it can be hard to justify hiring a property management company depending on the income generated from the property. However, with commercial investing it can be a no-brainer since you will have greater cash flow being generated and much more work to do.
  • Larger payout on initial investment. It makes sense according to the risk-return tradeoff that commercial properties will generate greater returns. This is based on the larger upfront investment required. Also, the commissions associated with selling commercial properties are typically lower, meaning you as the investor have to share less of the sale price.
  • Greater opportunity for value appreciation. Both internal and external factors can affect the overall property value. This gives you greater control. For example, improving certain parts of the building to be more efficient will help the property to appreciate. Also, the market in general can influence the property value.

 

Tips for getting started in commercial real estate.

 

If you’re unsure about where to start with commercial properties, we’ve compiled some tips below for you.

 

  1. Learn the industry. Commercial properties differ from residential ones, so it’s vital that you take the time to learn the ins and outs of this industry. You need to be on the same playing field as your competitors so make sure to do your research and increase your odds at success. This involves understanding typical lease arrangements, the required upfront investment (hint: usually around 30%) and other factors.
  2. Understand valuation techniques. This is extremely important. Commercial properties are typically valued based on square footage. This is because the space available for production activities directly corresponds to money being generated by your tenants’ businesses.
  3. Know what you can afford. As we mentioned above, lenders typically like to see that you have at least 30% of the required amount. You’ll also want to make sure you have some cash set aside for unexpected expenses.
  4. Learn to identify promising deals. The factors that make a great commercial property differ from what make a solid residential deal. 

 

As with anything unfamiliar, it’s important that you take the time to do the necessary research. There’s nothing worse than diving in and being blindsided. With that said, today's market is filled with many opportunities for the savvy investor. Our Rich Dad Education trainers will introduce you to proven strategies that can help you launch your career as a successful real estate investorand develop a "Rich Dad Mindset."

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