How to Start Investing in Commercial Real Estate: 8 Key Pointers
Investing in commercial real estate can open a lot of doors for new opportunities to grow your capital and generate more income. Diversifying your portfolio with commercial real estate comes with a lot of new benefits, however, it’s important to approach it with a clear plan in mind, understanding the available possibilities and risks before committing to investment. Included are some key pointers to help you in planning how to start investing in commercial real estate, to ensure you can get the most out of your investments.
1. Educate Yourself and Research
Before diving into the world of commercial property investment, make sure you’re knowledgeable about the market you’re stepping into and that you feel confident in your financial knowledge first.
Familiarise yourself with the different commercial property types and their characteristics, ranging from office or retail, to industrial properties. Learn about market trends, rental rates, vacancies, and zoning laws in your target area.
Broaden your financial knowledge by learning to understand important financial metrics, such as capitalisation rates or operating income. Consider taking courses or reading books on commercial real estate, so that you understand what you’re going into before you start investing.
2. Look into Commercial Property Funds
Commercial property funds offer a more accessible way to enter into the commercial real estate market with out all the financial commitment that comes with investing directly into commercial property – which can cost upwards of $5 million. Property funds allow for a form of pooled investment where investors purchase shares of the property, usually starting at roughly $50,000. This pooled capital allows individual investors access to more high-quality commercial properties that would otherwise be inaccessible.
Property funds are a great entry point into commercial real estate for those looking into starting investing. This also opens the door to finding professional property management as many funds can be professionally managed by a team of property investment experts. This allows for the ongoing management and fund administration to be overseen by the fund manager. This can also broaden investment opportunities by opening up the fund manager’s industry knowledge and network, while allowing you to enjoy a more passive approach to investments.
3. Define Your Investment Strategy
It’s important to draw up an investment strategy and define your goals before investing. Outline your financial objectives. Are you seeking long-term appreciation, steady cash flow, or a combination of the two? Consider your target market. What kind of commercial property and location aligns with your investment goals.
A well-rounded investment plan should cover not just acquisition strategies, but also ongoing management to ensure you’re getting maximised returns at every stage. Your plan should also consider your risk tolerance. How much risk are you comfortable with taking in your investments. Different property types and locations have varying levels of risk associated with them. These are all important considerations to take into account before starting on your investment journey.
4. Build Your Team
It’s very useful to have a good team behind you when getting started with commercial property investment. The right help can sometimes mean the difference between big returns and loss of value.
Start with looking for a financial advisor to help in the creating of a comprehensive investment plan. It may also be helpful to work with a property manager to help with day-to-day operations, tenant relations, and ongoing maintenance of your property. Property managers also come with extensive expertise in the market, backed by a network of long-term partnerships and an experienced team to help you. Real estate agents are also key in this process for their extensive knowledge in the market. It is also helpful to consult a real estate attorney to review contracts and ensure legal compliance.
A good team brings expertise, experience, and diverse perspectives, allowing you to navigate the complexities of commercial real estate to ensure you are investing effectively and reducing risks wherever possible.
5. Secure Your Financing
Effective financing is a big step in the property investment journey, so it’s important to secure your financing beforehand. There are many different options for financing, so it’s important to consult your experienced team and do your research to find the best option to suit your goals.
Explore different loan options, such as traditional bank loans or private loans. Alternatively, you could consider a down payment, which is an initial up-front partial payment, allowing you more time to gather the finances for the remainder of the payment.
These are only a few of the main financing options. It is always a good idea to speak to your team and financial advisor to discuss the best plan for you.
6. Consider the Benefits of Non-Recourse Debt
When getting into commercial property investment, non-recourse debt can provide a safety barrier for your properties, as it enables the fund to take on any necessary debt, rather than this falling on you, the investor. This means that the investors are not personally liable for the fund’s borrowings, which can be particularly attractive for those who want to limit their financial exposure.
With non-recourse debt, your financial risk is limited to the amount you’ve invested in the property fund. You’re not required to provide personal guarantees or risk your personal assets, such as your home, as security for the fund’s debt. This can provide extra security and peace of mind for yourself, which becomes increasingly important when you step into the world of commercial real estate investments.
7. The Importance of Diversification
Diversification is the key principle of investment, and commercial real estate is no exception. When you’re looking to start investing in commercial property, it is important to diversify your portfolio and spread your targets across multiple sectors and assets.
Diversification helps mitigate risk as you are spreading your investment across different sectors. This way you’re able to reduce the impact of any single asset’s underperformance on your overall portfolio. This can help protect your investments from fluctuating market performance and economic downturns, therefore, reducing risk while also offering the potential for more consistent returns.
8. Assess Whether Commercial Property Aligns with Your Goals
Deciding if investing in commercial property is a good idea requires careful reflection on your personal investment goals and risk tolerance. Commercial property is diverse, covering various industries and asset types, and it's important to determine if it fits your financial objectives.
When considering this, it’s important to ask yourself questions such as:
- What Are My Liquidity Needs? Commercial property investment, especially through property funds, is generally a long-term investment with limited liquidity. Ensure you're comfortable with the commitment before investing.
- Can I Manage the Risk? How much risk are you willing to take? Commercial property can offer high returns, but it also comes with risks, such as tenant vacancies and market fluctuations. Ensure that your portfolio can absorb these risks without jeopardising your overall financial goals.
- Have I Thought About Conducting Proper Due Diligence? Due diligence is essential for making informed decisions, protecting your investment, and minimising unexpected surprises after the purchase. Ensure you have thoroughly inspected the property, conducted environmental assessments, analysed financial records, reviewed legal documents, and researched the market to make an informed decision.
- Does This Align with My Desired Portfolio? The diverse nature of commercial real estate means that you can target specific sectors that align with your investment objectives. For instance, if you’re looking for stability, consider funds that focus on sectors like healthcare or government-occupied buildings, which often offer long-term leases and reliable income streams.
Conclusion: Is Commercial Property Right for You?
Investing in commercial real estate can be highly rewarding, but it comes with risks. Make sure you carefully consider your investment goals, risk tolerance, and long-term financial strategy before coming to a final decision.
