Commercial real estate for beginners

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How To Become A Commercial Real Estate King

If you want to really succeed in commercial real estate then you need to know where to start. So we bring you this article which is all about commercial real estate investing for beginners. We will show you what to do to get your foot on the ladder of this most lucrative of businesses.

Why Invest in Commercial Real Estate?

You may have considered residential property investment before, but the rewards in commercial real estate can be a lot higher. The income potential is normally a lot larger and the cash flow a lot more steady. Vacancy risks are lower and leasing contracts tend to be a lot more attractive.

Usually commercial properties attract a potential income that is higher. The return on investment is usually higher on average at around 6% to 12%. Commercial properties normally consist of several units and this makes the vacancy risks lower. Contracts for leasing will usually last significantly longer than with residential properties.

Cash flow is more consistent. Longer leases mean that you can rely on steady income a lot more. With multiple units in your commercial property you will also have the advantage of multiple income streams.

There is a lot less competition in the commercial property space. Making an investment in office properties or other commercial properties is a major undertaking that will put a lot of potential investors off.

How to Invest in Commercial Property

The number one rule of investing in commercial property is “you need to do your due diligence”. Details are everything in the property investment game and this certainly applies to commercial real estate investing.

You will need to learn and fully comprehend the details of commercial investing and what makes it work. A critical element of this is conducting the right market research. If there is no demand for leasing your commercial property then the whole thing will not be viable, and will not make you the money that you desire.

Commercial property is not valued in the same way that residential property is. The income derived from commercial property is all about usable square footage. Then there is the location of your commercial property. You must find a property where the demand for office or retail space is high.

Also you will need to pay particular attention to the neighborhood that the chosen commercial property is situated in. Talk to the locals to find out everything that you can about the area. Does the local authority have any plans that will jeopardize your commercial real estate plans? If everything is good then this can be a great long term investment.

The second step is to look for comparable buildings and this also includes future developments research. In the trade these are referred to as “comps”, and it is all about the prices that similar buildings have fetched that are in the same area and have a similar size and style.

When you are looking at comps, always remember that you need to choose commercial properties that have a square footage that is within 10% (either higher or lower) than the property that you are looking into. If properties are outside of this range then the comparisons will not be accurate.

The last step is for you to learn and fully understand the key metrics used to evaluate real estate. There is a lot of math involved in the assessment of commercial real estate and you have to know the formulas and how they work:

Net Operating Income

This is all about the revenue of a property and its costs. Calculate this without the application of taxes. Use this to estimate the potential income that a property will yield less the essential operating expenses such as property management costs, insurance, repairs, property tax and utilities.

Cap Rate

This is the capitalization rate for calculation of property values. It is all about estimating future cash flow and profits. It is the ratio of your net operating income against property asset value.

Cash on Cash

This metric estimates the rate of return that investors will receive on their commercial property. You only need to use this metric if you are using external financing to buy the property. It measures the actual return on the cash that you have invested.  

 

 

 

 

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