A Beginner’s Guide to Navigating the World of Commercial Property Investment
Welcome, aspiring real estate moguls! Today, we’ll be diving into the thrilling world of commercial real estate investment. By the time you finish reading this blog post, you’ll be well on your way to understanding the ABCs of this lucrative market. So, buckle up and let’s embark on this exciting journey together!
1. How to Say It. People want to add an invisible “a” between the two syllables and pronounce it “real – a – tor”. It’s two syllables and two syllables only – “real-tor”. Even some Realtors pronounce it incorrectly (if your Realtor does, my advice is to find another Realtor!).
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Several months ago, I completed an evaluation of an apartment building, something I do frequently. In this case, the owner (I’ll call him “Bob”) wanted to sell the property and retire. Bob had self-managed the asset for nearly 18 years and, while the property had performed good enough financially, he was tired of dealing with the “tenants and toilets”.
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Real estate investing is one of the most lucrative investment vehicles out there. However, as with any investment, it’s critical to do a deep dive of the asset to ensure the risk – reward benefit meets your individual investment criteria.
While there are dozens of due diligence items that should be completed prior to a property closing, you can go a long way by starting with 6 basic questions.
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One of the most frequent questions I am asked is, “What area of real estate should I invest in that will have the lowest acquisition cost and pay the highest returns?”
That’s a question I’d love to be able to answer! If I had that crystal ball, I’d spend a lot MORE time making memories with friends and family, volunteering and traveling and a lot LESS time in the office! That’s the real estate investor’s ultimate goal – steady passive income that supports their lifestyle while still growing their net worth.
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My sister gave me a pink Hyacinth plant for my birthday in March. It was extremely low maintenance – I just needed to keep the container 75% full of water. I added a glass globe to protect it from our cat’s nibbling and set it in a sunny spot.
After only one week, the plant had doubled in size and was already blooming! I was so excited! I added another globe to protect the graceful leaves and gorgeous blooms.
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We sure do love our acronyms in the commercial real estate world! That’s because acronyms, and the calculations they represent, are essential tools to use when evaluating investment opportunities.
While a dedicated Broker will calculate these for you, it’s important that you have an understanding of the financial performance measurements and how they are used.
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Doing a good job of due diligence when purchasing investment real estate means evaluating a number of things, including property condition, geographic considerations, market factors, financial records and ratios such as CAP rate, ROI, GRM, rental history, market rental rates, retail / office tenant mix, etc. It’s easy to see why some potential investors get “analysis paralysis” – a lot of work goes into the evaluation process!
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One of the most frequent deal-killers for prospective Tenants is the Personal Guarantee, which is why we discuss it at the beginning, not the end, of the site selection process. While not all Landlords require a personal guaranty, the vast majority do, so it’s something prospective tenants should be prepared for well in advance of submitting an Letter of Intent to Lease (LOI).
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When it’s time to move your equity from a real estate investment, there are typically three paths to choose from, each with its own pros and cons. It’s critical that you consider all options and consult with your tax and other advisors before deciding which path makes the most sense for you and your specific situation. However, a brief overview of the three directions will get you started on your journey.
