For many individuals, commercial real estate represents an incredibly valuable and attractive investment opportunity. Yet for many first-time or somewhat new investors, commercial real estate investing is surrounded by many misunderstandings. Over the coming weeks I will review a few myths about and a few mistakes in CRE Investing.
THREE MYTHS About Commercial Real Estate Investing
1. Too Much Money
This is perhaps the biggest myth of all. Many people I speak with think that commercial investing requires deep pockets to acquire and finance. While it is true that some commercial properties can require a large capital investment, there are many opportunities that don’t! Although residential investments tend to require a smaller capital investment than a commercial property, lenders will often be more attracted to a commercial than a residential investment due to the fact that they offer greater profit potential and a more stable recurring income. (Read about some of the other differences between residential and commercial investing here.)
INVESTING TIP: When seeking funding from a bank, do not forget the importance of a professional presentation. You must present (and convince) lenders that you have the skills, experience, and drive to see the deal to successful completion. Do that, and show enough profit potential, and financing will be less of an issue than you think (no matter how complex the commercial project becomes).
2. Good deals are hard to find
First of all, the term “good” is subjective and individual-based. A deal that is good to you may be a waste of capital to other people. However, there are always good investments in real estate, at all times, it all depends on how you intend to proceed. Some people prefer to buy properties when the market is down because the property should appreciate in the long run. On the other hand, triple net lease properties are usually always available, no matter the market. These deals generally provide a fairly stable risk profile and are a “good” investment for most everyone.
INVESTING TIP: Become a diligent student of investing and the commercial market in your area of focus. By doing your homework, and knowing exactly what kind of commercial investment you are aiming for, you will be ready to strike when the best opportunity presents itself.
"...there are always good investments in real estate, at all times, it all depends on how you intend to proceed."
3. You don’t need a real estate broker
Technology these days allows individuals to be more empowered and knowledgeable in the real estate search. With the advent of LoopNet, and other Zillow-type tools, anyone can begin to scour properties on the market. However, do not let this ability trick you into thinking you can handle a real estate transaction on your own. Unless you are a real estate broker yourself, you need a broker to represent you in a transaction. Brokers know the ins and outs of investing that you may not know, are aware of information that is not public, and have important knowledge such as comparable sales data, investment analysis, and underwriting skills. Trying to go it alone is asking for trouble.
INVESTING TIP: When talking to potential brokers, make sure they have experience with transactions involving the particular type of property and deal you are looking to find. Just like with any other service provider, do your research. Talk to other investors about the brokers they have used, read Google reviews, and sit down to speak with each potential broker. You want someone that you feel confident knows the market and will advocate for your needs.
I hope these myths help you feel more confident as you approach your next CRE investment!