With companies beginning to pick up in business again after a few waves of COVID-19, more individuals are beginning to think of investing in commercial real estate. Many are speculating that these properties will lower costs while also receiving a boom in patrons now that individuals are looking to get out of the house and spend their money.
There are five types of commercial real estate people typically invest in retail spaces, offices, industrial sites, multi-family properties, and unique purpose properties like car washes. You may feel drawn to specific commercial properties and decide to invest in a location more tightly connected to your niche. Whatever you decide upon, there are some ground rules you should educate yourself on to have a successful transition to being an investor.
Understand the Difference Between Commercial Real Estate and Residential Properties
One big misconception people adopt the belief that commercial real estate is equal to investing in residential properties. However, there are some vast differences. For instance, commercial real estate leases will most likely last longer than residential leases. Commercial real estate is also closely related to the amount of square footage able to be used. These two factors give the investor a much higher chance of receiving better income from commercial real estate.
Research the Typical Price Paid for Comparable Properties in the Area
Before investing all your money into a property, you should research other local properties of similar size and style. It is important to know the actual current market value of a property before committing to purchasing it, primarily to ensure you are not getting screwed over in any way, shape, or form. This is essential information to have before investing in commercial real estate.
Understand Your Success Metric
It is vital to understand finance and other industry trends when investing in commercial real estate. Success may look slightly different depending on the type of property you invest in, but there are specific rules of thumb to follow.
- Net Operating Income: This calculation combines revenues and costs from property to provide the investor with an idea of how much they will make. Of course, there are operating expenses thrown into budgeting as well. Still, your net operating income will show how much you will have leftover after putting money towards these other expenses.
- Cap Rate: The capitalization rate gives investors a good idea of what their future profits could be. It is calculated by dividing the property’s net operating income by the current market value.
- Cash on Cash: For investors who rely on financing to purchase properties, cash on cash provides them with a return rate for their investments. Comparing how much money is invested to how much was financed gives investors a better look at their investment performance.