1 Commercial real estate investment
Generally people buy residential plots/houses as an investment, but there are many advantages in buying commercial properties as well. In case you decide to buy a 5-unit apartment then think twice because buying a 10-unit apartment will work out cheaper for you.
Valuing a commercial property is usually done differently. The income derived from a commercial property is directly connected to its income. However, generally, it need not be the same principle with residential property.
In commercial real estate investing the risk is not complete but partial as you will be renting out many flats/room spaces and if one tenant is lost it does not affect the owner completely because he will still be receiving rent from the others. The flow of money is still there. In a residential property you have only one tenant and your income stops when the tenant is lost. Commercial real estate leases are for a longer period and that is an advantage. There are many big banks who deal with commercial real estate lending. However, the initial down payment may be a little higher than residential; usually it is 30% or more.
For getting started with commercial real estate investing you have to do a lot of spade work. Find out the amount of rent paid by the previous tenants. Check out about what kind of businesses flourish in this particular area, etc. If you spend some time on all this and find out what it is that ticks in commercial real estate, then you will be profiting financially. Therefore, the wisest thing to do is to invest in commercial real estate.
Some general tips while investing in commercial real estate:
- Think in terms of a bigger investment so that you get good returns and your risk is balanced out.
- As you are planning to make a big investment, take your time. The work involved, that is, purchasing, decorating or redoing and selling it, will take some time. The returns will not come back to you instantly, but gradually.
- It is advisable not to just blindly go in for apartments or residential properties. Think of the advantages in investing in commercial properties as well.
- Initially you will have to spend some extra time in getting to know just about everything. There is always a first time and you have to do a bit of learning.
- People follow certain formulae while investing in commercial property, like net operating income and cap rates. Get to know the advantages in the area where you are planning to invest.
- Building good relationships is vital. You have to make friends with other investors and lenders. The more people you know, the easier it will be for you to clinch good deals.
- You have to scout around for good financiers, in advance, who may also help you get finance for the down payment. If you work with a partner then it becomes easier.
- You have to be ready to shell down money for the pre-loan work involved. Get an appraisal, property inspection, other tests and inspections done. They may cost a little more than residential loans, therefore, you have to be financially prepared for this.
- It is better to always have private lenders and partners who will help you financially; so that you will be able to repay them in installments, as soon as you start earning an income from the commercial property.
- Finally, it is very important for you to get sound advice for your tough questions from commercial investors and lenders before you enter into any contract. Better to be safe than regret.
These are a few hints that may come in handy when you are investing in commercial properties.