Equities (stock market) can offer strong appreciation but also unpredictable volatility from external influences. From February 20th through March 20th alone, COVID-19 resulted in a 32% decline in a 1-month period!
Similar to on-line investing in the stock market, you can be the Do-It-Yourself investor with a free LoopNet online subscription, but those people often remind me of the old saying from the legal industry, "A man who is his own lawyer has a fool for his client."Alternatively, forging a reliable and trustworthy relationship with a Certified Commercial Investment Member (CCIM) designated broker will help ensure you find and successfully complete the most-appropriate CRE investment opportunities based upon your investment risk-reward profile.
Let’s review how a CRE investor can lay the foundation to efficiently and successfully execute the CRE investment transaction which will support your long-term financial goals.
1. Interview a broker
There are many advantages to be reaped from investing in a cash-flowing commercial property. In order to gain the most benefit from these investments, you need a partner who is well-versed in the market to guide you, offer industry expertise, and help you develop a strategy that supports your long-term goals. When it comes to commercial real estate, you absolutely do not want to embark on an investment opportunity alone. Partnering with a CCIM-designated broker isn’t just a recommendation, it’s a wise business decision.
When you’re looking for a broker who can help you successfully execute on the right commercial property investment opportunities, you’ll want to find someone who has many years of experience in the industry, a track record that shows successful strategy development and execution, and is someone you trust to support you through future investment endeavors.
2. Educate yourself about commercial real estate financing
Investing in commercial real estate has very different considerations versus residential investing in a variety of ways, but especially in regards to financing. Most commercial property investment opportunities are going to require you to meet a much higher financial threshold, in addition to being able to make a much larger financial commitment in the form of equity.
Before you get started, you’ll want to familiarize yourself with:
- Commercial Interest Rates
- Commercial Loan Terms
- Loan Payoff Penalties (e.g. Yield Maintenance, Defeasance)
Additionally, you’ll need a detailed understanding of the specialized financing for certain types of properties, including Industrial, Office, Mixed-Use Retail or Medical Office. Armed with working knowledge of the financing component of commercial real estate investing, you’ll be able to make educated and informed decisions when commercial property investment opportunities arise.
3. Develop your near-term and long-term strategic goals
The next step in identifying the best commercial property investment opportunities is to determine what goals you have and what specific property types or features will support those goals.
It’s important for you to have a clear idea of the role you want to play in the marketplace and the role your investment properties will play in your overall strategy before you make any decisions. Having a game plan helps you better organize your investment efforts to maximize your returns while minimizing the time and effort required.
There are two types of commercial property investment opportunities that I would like to discuss: cash-flow and value-add.
- Cash-Flow - A cash-flow commercial property will generally be stabilized by high occupancy rates with low near-term tenant turnover. Leases can be signed below, at or above current market rates and the expenses of owning the property will be low enough to be offset by rental income.
- Value-Add - A value-add investment will generally have deferred maintenance, lower occupancy, and/or below-market rental rates. These investment opportunities will also likely require some form of updating to the building’s appearance, mechanical systems, and/or leasing/marketing campaign. These investments often-times need a much more hands-on management approach.
Your overall investment strategy will dictate what makes the most sense for you long-term and guide you toward or away from commercial property investment opportunities as they arise.
4. Weed out commercial property investment opportunities that don’t fit
Commercial property, at a high level, can be bucketed into a few key categories. You have your retail, industrial, office, medical office, flex, mixed-use, and multi-family investments. There may be an outlier here or there, but at the end of the day, you’re looking at a select few property types, each with their own pros and cons. You’ll want to determine the specific property types that align with your strategy.
Additionally, you’ll want to determine the leasing strategy that makes the most sense. Properties with a triple net (NNN) lease typically don’t necessitate significant hands-on involvement from the investor/owner. The tenant typically will pay rent and utilities, as well as real estate taxes, maintenance, and building insurance. This is a more passive approach to commercial property management with lower risk, but it also often means lower yields. Your broker can help you determine what leasing strategy makes the most sense for your long-term goals.
5. Determine your property management needs
Some commercial property investment opportunities will require specialized property management services that you, as the investor/owner, may not want to do on your own. Depending on the types of property you’re investing in, you may or may not need third-party property management services. It’s important for you to determine whether or not this is something you’re interested in and how you want to approach it should an investment opportunity necessitate it. Contemplating this decision, in advance, will help you filter out opportunities that don’t align with the day-to-day responsibilities you want to have.
Your source for the best commercial property investment opportunities
At the end of the day, there are no right or wrong commercial property investment opportunities. There are, however, right and wrong opportunities for your personal strategy. When it comes to making an educated and informed decision on the multitude of investment opportunities that exist currently, you want a source you can rely on for industry expertise.
When you’re looking for expert, consultative guidance on the most appropriate commercial property investment opportunities for your long-term goals, call on Fountainhead Commercial.