Real Estate Tips

10 Tips For Investing In Commercial Real Estate
Friday, February 12, 2010
Written by:
Alan Brymer
Having the right perspective, and plenty of patience, are necessary traits for investing in commercial real estate. Experts say that success in commercial real estate investments requires the willingness to spend a lot of time and effort upfront in researching, developing the right relationshipsand identifying the right type of investment. See the following article fromREIClub for more on this. 

Most real estate investors get started buying single-family houses, probably because it's what we're the most familiar with. But whether you're going straight to the big time or are ready to advance from houses to larger (and more profitable) deals, here are 10 time-tested guidelines to followthat will help you have more success.

Tip #1: Think Big

If buying a 5-unit apartment requires you to get commercial financing, which is more of a hassle, then why bother? I would recommend buying properties with at least 10 units. Remember that the more units you buy, the cheaper they are per unit. Also, Dave Lindahl has been quoted as saying, "It's no harder to manage 50 units than it is10."

Tip #2: Take Your Time

Commercial deals take longer than single-family houses do. 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. Think of commercial deals as big bonuses or your retirement vehicle, not a way to create quick cash to pay the bills.

Tip#3: Don't Choose Apartments By Default

There's nothing wrong with investing in residential apartments per se. I'm just pointing out that since most investors are already comfortable with residential property, they tend to look for apartments without considering the other types of commercial property, such as office buildings, industrial, mobile home parks, land, etc. Weigh all of these propertytypes and choose your own niche based on whatever will help you reach your unique goals, regardless of your comfort zone.
Tip #4: Be Prepared to Spend a Lot of Time at First

Fight the temptation to get discouraged if you haven't done your first deal yet, or if you are spending more time per deal than your previous ones. Houses are so similar that it's easy to make a cookie-cutter system forbuying and selling them. When I begin looking for commercial properties, I was surprised at how long it took me in the beginning to screen deals and make offers. Just remember that there is a learning curve, like with anything else, and that things will go faster over time.

Tip #5: Learn the new formulas

If you're buying houses, you may use certain formulas, like buying at 75% ofAfter-Repaired Value, minus estimated repairs. Commercial property will have new and different formulas to get used to, such as Net Operating Income and Cap Rates. Learn what is considered good in your area and get familiar with them when making offers.

Tip #6: Relationships Are Even More Important

Relationships with other investors and private lenders are important when buying houses, but they are evenmore so when buying commercial properties. For one, properties costing a million dollars or more are probably within the financial wherewithal of most of us individually, so you probably have no choice but to get to know and work with partners. Also, many commercial properties are sold without being listing first, so the more people in your network who know what you're looking for, the more dealsyou'll find.

Tip #7: Find Good Financing In Advance

Commercial loans are a different animal than residential loans, and in some ways better. The down payments needed are usually a higher percentage than loans on single-family houses, which means you’ll have to put more down (or get your partner to put more down). However, there is often no personal liability if the deal goes south, and...