Commercial real estate or CRE is an appealing investment sector having constant returns, growth potential, and generating passive income. As a result, this particular sector of real estate investing is becoming more popular as an alternative source of income. However, though commercial real estate is profitable for investors, not all commercial investments are equal. Therefore, it is crucial to know where, when and how to start investing in property from the very beginning.
As a real estate investor, it is also important to know about the common pitfalls, mistakes, and risks associated with commercial properties. If you know about all these, you can be careful from the beginning. If you think to invest in CRE, here are some of the important things to keep in mind before you start.
Not All the Properties Are The Same
Commercial real estate involves lots of varieties. While commercial real estate is classified into 5 main sectors like office, retail, industrial, multifamily and buildings for special purposes, many other properties fall into commercial properties like self-storage facilities, medical, elder care, hotel and the land. As a result, the supply-demand and the overall profit from all these sectors vary largely.
Among all these, some of the property types perform better than the others depending upon the supply and demand in the asset’s particular location. But considering the macro level, some commercial sectors perform better than the rest. Hence, it is very important to identify the asset types that are more profitable and have better opportunities than the rest.
The top-performing asset in the commercial real estate field is the industrial buildings, while the retail space performs the lowest. With the increasing demand for online shopping, retail properties are still struggling to compete but facing short returns and a decline in overall growth. Thus, before you start to invest, it is crucial to research the performance of each one of the assets in the current economy and determine the viability of the sector as an income source and then choose the particular CRE to invest in.
Better to Know Market Area and Supply-Demand Chain
One of the major things to know before investing in commercial property is that not all markets are the same. When you invest in commercial property, you invest in a particular area with its supply and demand chain. Therefore, some commercial properties might be doing well on the macro level, but you can find an oversupply in the city or the reverse in some cases.
A good start is to research the market supply in the immediate area considering both the current rentable square footage and the additional square footage from the present construction and planned developments. Then, if you have come across any property type that is undersupplied with the resources in the specific market, you can study and outline the future growth in that specific sector.
Check The Due Diligence
The due diligence period is the time where the prospective buyer will research the investment opportunity. This includes reviewing the documents, tax returns, financials, profit and loss statements, and conducting the property inspections, feasible study, surveys, or any needed research. For example, suppose you invest in several commercial properties like real estate investment trusts, crowdfunding, partnerships and private funds. In that case, the due diligence will involve vetting the individual or the organization handling the investment.
Understanding The Market Cycles
Indeed, nothing lasts forever. The condition of the economy, GDP rate and unemployment rate are directly related to the profitability of CRE. Therefore, while investing in commercial property, it is important to understand how the real estate market cycles, which will further help you avoid buying when the market price is too high.
Be Prepared for Setbacks and Downfalls
There are so many uncertainties with the cost, there are also uncertainties associated with the timeline. Sometimes, people set unrealistic timelines to build, renovate, lease and market rents. However, the new construction, increased rents, changing management and introducing new systems take time.
Investing in commercial real estate for beginners will be beneficial if the process is carried on by passive vehicles like crowdfunding, syndication, property listings and partnerships.
Wealth BCI is one of the most popular commercial property investing platforms that enable the sellers to experience a smooth transaction in liquidating commercial properties in Arizona and nearby locations. Investors can also benefit from these listings by selecting the best investment that meets their needs and budgets.