Commercial Real Estate Investment involves buying commercial properties that are bigger than a 4 unit apartment building. It is that real estate investment in which an estate is rented out or sold to make profit through rental income, interests, dividends, royalties, etc. but not for primary residence. It is better for the investors who are beginners in the field to avoid commercial real estate investment strategy. On the other hand, experience investor can go for for this kind of investment as the competition is much less. It is also the best choice asset class for building wealth, you may ask why? This is because there is a limited supply of land; no more land is being created! If you select a real estate with a land component in an area of increasing population and demand, the laws of supply and demand will work in your favour to increase the value of your investment. It provides better leverage than any other asset investment, with the ability to typically borrow at least 80% of the purchase price on house and land packages. 100% lends are possible in some circumstances. It physically exists and everybody needs a roof over their head. Wherever there are people, there will be demand for real estate. Given a healthy national economy, no deflation, an increasing population, or at least increasing demand for property in your chosen investment area, then your investment is liable to increase in value over time. You may have no control over the state of the economy, but I tell you, you can stack the chips in your favour by selecting the right type of property in the right area. Commercial deals take longer than other investments. They take longer to purchase, renovate, and get sold. This is not necessarily a bad thing, but something to keep in mind so that you don’t get impatient or rush into a bad decision.
Tips to help you succeed in commercial real estate investment
This investment is not a get rich quick scheme. It takes time as I said earlier to buy, renovate and sell, so you need to be patient. Think big and embark on big investment, buy properties at least 10units, remember that the more the unit you buy the cheaper they are per unit. Be prepared to spend a lot of money at first, fight the temptation to be discouraged by this, always have in mind that you can overcome this by borrowing from real estate investment trust or other source as I mentioned in one of my articles. Predictability is required in this investment because it follows a cycle which can be predicted, with predictability you can grow. It also requires consistent and persistent. Learn to analyse properties, know the worth before buying. Before now you suppose to know that commercial real estate is the business of marketing and finance, so you have to be master of finance, learn about mortgages and interest rate, loan programs that are out there. Also you need to be a skilled problem solver for anything going on in the business field in other to excel in this investment. Finally, remember that this business is not static, it changes in strategy and other aspects, so you have to be updated in the latest information, to do this you have to continue with your education/training on this.
Thing to look for when buying commercial real estate investment property
1. Solid Land Component; Aim for an investment where at least 30% of the purchase price is comprises of the land component. House and land, villa units, townhouses, and low apartment buildings can all fit in the bill. Land is the only limited resource, and that means value for you. If you purchase a unit in a high rise, not only will the value of the building depreciate over time, but what is to stop developers erecting more high-rises and diluting the supply in your market?
2. Stable or Increasing Population; Invest in an area with an increasing, or at least stable, population base. Avoid towns which are dependent on a single industry for the bulk of their employment. If the industry folds, so will the tenants.
3. Transport, Shops and Public Amenities; Invest in an area close to schools, shops, public transport and good public amenities such as a post office, library and park lands. These are the basic factors that make an area desirable to live in and will help to ensure continued demand for property in that area over the long time.
4. Affordable for an Average Worker; Select a median property in a median area, one which is affordable for the average workers. High end real estate is prone to vacancy and busts in recessionary times. Low end real estate is less desirable, can attract a lower quality of tenant, and cost you more in maintenance. Aim for a property that will rent for no more than 40% of the average household income for that area, preferably 30% of the household income.
5. Affordability for you, the investor; Try to invest in property that at least pays for itself, that is to say that the rental income will at least cover your mortgage repayments, insurance, maintenance, management fees, local rates and taxes. If this is not possible in your area, consider alternative areas. Otherwise you can still build wealth with negative geared property. Tembusu Grand