Investing in commercial real estate isn’t the same as purchasing and renting out residential real estate. While there are surface-level similarities, that could be said about any investing venture. To succeed in the commercial sector specifically, you need to follow 5 carefully curated steps.
5 Steps That Will Turn You Into a Commercial Investor
Whether you’re a commercial interior designer looking to break into investing or a residential agent looking for something different, here’s how to intelligently invest in the commercial sector.
1. Choose a Profitable Niche
The first and most important thing to do before becoming a real estate investor is to research the industry. Education is your greatest asset, so try to soak up all the information you can by listening to podcasts, reading books, and watching videos about commercial real estate.
If possible, join a real estate investing group online or get a job in commercial real estate. This can fast-track your progress and get you familiar with different niches and investment strategies.
There are five common types of commercial real estate you should consider investing in:
Multifamily: Includes duplexes or apartments with hundreds of units
Office: Includes office buildings ranging from small units to skyscrapers
Retail: Includes any center, building, or house with a commercial purpose
Industrial: Includes warehouses and distribution centers of all sizes
Hospitality: Includes hotels, motels, and short-term/vacation rentals
If you want to learn how to cut real estate project costs, look at each niche’s pre-development stage. You can also consider investing in a niche that receives the highest ROI. For example, warehouses, self-storage, and coworking spaces are still in high demand and inexpensive.
2. Choose an Investment Strategy
There are many different kinds of commercial real estate investment strategies, but you need to choose one that’s right for you, your goals, and how long you want to sit on your investment.
Consider the following investment strategies before you jump in:
Land Banking: Involves purchasing land in the path of a development project
Development: Involves purchasing land with the plan to build on top of it
Fix & Flip: Involves buying a property with the intent to fix it and sell it
Owner-Occupied: Involves buying office space you plan to run your business out of
Wholesaling: Involves buying a property for cheap and reselling it to an investor
Passive Investing: Involves buying properties and holding on to them long-term
BRRRR Strategy: Stands for buy, rehab, rent, refinance, and repeat
While you don’t have to stick to one investment strategy, it’s better to focus on one at a time. By niching down, you become an expert in that specific real estate market. You’re also more likely to build a reputation for yourself in the industry, which benefits your marketing and acquisition.
3. Learn How to Underwrite Investments
Typically, underwriting is when a lender assesses a borrower’s creditworthiness and risk before issuing a loan. In real estate, underwriting is a financial projection of your future cash flow.
Underwriting is essential in commercial real estate, as it takes multiple variables, like the entry and exit cap rate and vacancy rate, and estimates how much you should borrow. Investors can underwrite an existing business, which is usually easier, or a new/upcoming development.
You may need a course and tons of practice to get this right. We recommend underwriting at least one deal a day, even if you don’t want to invest in these properties, to perfect this skill.
4. Build an All-Star Investment Team
No one says you can’t build a successful investment business or portfolio on your own, but it’s usually a bad idea. With a team, you can get more done in half the time (and make more profit).
Here are five people you absolutely need to have on your investment team:
Commercial Property Broker
Commercial Real Estate Attorney
Commercial Property Management
Commercial Property Lenders
You can easily see a pattern here: every person is a commercial real estate specialist. Hiring a generalist, even if they’re cheaper to hire, could result in legal disputes. There’s no guarantee that a general contractor is aware of commercial zoning laws, so don’t take that chance.
5. Make an Offer Once a Week
If you aren’t making an offer at least once a week, then you aren’t underwriting enough. When you stop underwriting, you’re going to miss out on a great commercial real estate deal.
Always remember that commercial investing is a numbers game. Most properties won’t be worth your time, but at least one of them could turn a profit. Once you find “the one,” send a letter of intent and see what happens. Even if they don’t respond, you still got some practice in.
