Investing in property is a great way to diversify your portfolio. These investments tend to be less volatile than the stock market, commodity, and money market investments, but they also typically have higher returns than CDs and bonds. However, if you have never invested in commercial real estate, the process can seem overwhelming. These are a few commercial property investment tips you may consider.
Conduct Thorough Financial Analyses
Your first task should be learning to read a commercial property proforma. This statement provides the property’s financial analysis. You can identify the revenue the property produces, its vacancy rates, and operating expenses. You should also understand the cost of servicing any debt you have for the property, such as your down payment and interest expenses.
You should also calculate the net operating income, CAP rate, and return on investment without the debt service cost. Finally, look at your internal rate of return.
These figures should be compared across properties. You can also compare them to other investment opportunities, such as residential property, stocks, and bonds, but determine your risk tolerance before choosing your investment.
Learn About Financing a Commercial Property
Commercial property financing can be significantly different from financing a residential property. First, the loan size is much larger. You may court investors, but you will need either more of them or their investments need to be much larger.
If you choose to finance your property with a loan, you should understand interest rates and their dependence on the prime rate. You should know more about how banks borrow so that you can borrow from them. Learn how amortization can stretch your loan out while reducing your monthly payments but understand the effect this strategy will have on your interest rate.
You should also check into the different types of loans, including agency and traditional lenders, and what their requirements are. In addition, the amount you can borrow to finance the property is often based on your income from the real estate instead of its actual value, which is the opposite of residential loans.
Research Different Property Types
Commercial property is a broad categorization. It includes retail, storage and warehousing, office, manufacturing, and multi-family real estate. Each of these types of commercial property has its advantages and disadvantages. For example, because they are like residential real estate, multi-family units are popular with new investors. However, they tend to require more attention and maintenance.
These are just a few tips for investing in commercial real estate. However, do your due diligence and learn about these assets before you begin your commercial property investment journey.