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Investing in Commercial Real Estate without Making Mistakes

Many real estate investors first become involved in commercial real estate by purchasing single family homes because they are what is familiar. Regardless of whether you are considering investing in a single family home or something larger, there are a few tips to keep in mind in order to avoid some of the more common mistakes.

First, keep in mind that you need to have a fair amount of patience when dealing with commercial real estate investing. On average a commercial real estate investment is going to take longer to finalize than the purchase of a single family home would. Not only does it take longer for the purchase process to conclude, but you will also likely spend more time on renovating your project and selling it. Considering the fact that the profits on a commercial project are higher than that of a single family residence this is not necessarily a disadvantage, but it does mean you should be prepared to take your time and try not to rush ahead into decisions that might not be that well thought out.

Also, consider whether apartments are really the best choice for you if you are going to invest in commercial real estate. While there is nothing really wrong with the idea of investing in apartments, they should not automatically be your default option without at least considering other commercial property options such as industrial, office buildings, land, mobile home parks, etc.

It is not uncommon to use certain formulas when investing in real estate, such as always purchasing at a certain percentage of the after-repaired value, less any estimate repairs. While such formulas may apply well to purchasing and reselling single family residences, be prepared for the fact that you may need to use different formulas when investing in commercial real estate. Two of the most common formulas that you will likely encounter and need to become accustomed to are Cap Rates and Net Operating Income. Make sure you keep these in mind for your particular area and are familiar with them as you make any purchase offers.

Relationships are always important any time you are working with private lenders and investors, but as you become involved in commercial real estate investing those relationships become even more important. The more money that is involved in a commercial real estate deal, the more important it becomes for you to carefully get to know your partners and work with them a deeper and closer level. In addition, in many instances commercial properties are often sold without ever being listed on the open market, meaning the broader your network, the more likely it is that you will be able to find suitable deals.

Financing is another important consideration in any real estate investment, particularly in terms of commercial real estate investing. A commercial loan is dramatically different from a residential loan. You may be surprised to find there are advantages associated with a commercial loan that cannot be received through a residential loan, such as the fact that there are often no worries regarding personal liability if the deal does not work out. In addition, the rules for commercial loans are often not as strict regarding where you can obtain the money for the down payment. Be sure to take your time and shop around for lenders in order to find the best deals.

Do not make the mistake of overlooking important elements and safeguards such as obtaining a property inspection, appraisal and other inspections or tests simply because you are in a hurry to close the deal. While these elements do involve money and time, they can help to protect you and your investment.

Consider using partners to help you take the most advantage of all of the resources that are available to you. Few people today have the ability to invest millions of dollars on their own without some assistance from a partner. This makes taking the time to locate partners or private lenders for your commercial real estate projects even more important. Through a partner you can tap into necessary resources such as credit and/or cash that is needed to purchase investment properties while providing compensation in the form of a percentage of the cash flow, interest or proceeds from the profit when you sell the property.

Finally, make sure you know where to turn to have difficult questions that you may run into throughout the process answered. While there is much to know about commercial real estate investment being able to receive reliable advice fast can help you to avoid many potential mistakes.



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