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.
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
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.
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.
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
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
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
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
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
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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