Real estate has been one of the most popular investments for centuries now and millionaires say it’s still the best investment today.
You may be wondering if this industry is right for you and your money. Well, if you know what you’re doing, the answer is yes. Let’s talk about the ins and outs of how to become a successful commercial real estate investor.
Types Of Real Estate Investments
There are different types of real estate investments that you can make, and they are all relatively safe options because they involve real, physical assets that limited in quantity, such as buildings and land.
If you don’t have any real estate experience but still want to get in on the action, REITs (real estate investment trusts) are one option.
REITs are similar to stocks in that you buy them on a stock exchange using a ticker symbol and receive dividends. At its core, a REIT is simply a real estate company that is obligated to pay out at least 90% of all profits to investors in the form of dividends.
Some REIT dividends yield 2-3% annually, while others go up to 6-8%. That’s with no maintenance work, making it a truly passive investment. Of course, the downside to REITs is you don’t actually own the property. Rather, you own shares in a company that owns, operates, or develops income-generating real estate. Thus, REITs are paper assets, not physical assets you could touch.
There’s also the industry of flipping houses for profit! When you time the market just right, you don’t have to do any repairs to make a profit. However, it’s much more common to buy a fixer-upper, put in a lot of hard work, and resell it for gain once the repairs are complete.
Rental Real Estate
Throughout this article, we’re going to talk mainly about rental properties, because rental real estate is the most common type of real estate investment. In fact, there are over 8 million independent landlords in the US.
The process is simple enough. You buy a house or a multi-family building and you rent it out to tenants who pay you to live there for a specific duration.
This is widely considered one of the safest investments out there, because you have the highest measure of control over your investment at all times, there are steps you can take to maximize your profits, and as long as the building is standing, you can continue earning!
These could be either short-term or long-term rentals, because they work in similar ways. With short-term rentals (like Airbnb), you will be charging a lot more for the amount of time they stay, but sacrificing the guaranteed income. With the AirBnB approach, you also have to operate your property as a hospitality business, which means providing customer service, cleaning services, linens, and basic essentials.
In contrast, if you rent your property using 6, 12 or 24 month lease, you ensure steady income for the duration of the lease in exchange for a fair, long-term payment agreement.
What Makes A Real Estate Investment Unsuccessful?
To understand how to be successful when investing in commercial real estate, it’s also important to know what can hurt your investment. Because real estate is such a long-standing, time-tested investment, you have the benefit of learning from previous investors’ mistakes.
1. Poor Choice Of Building
Here’s the thing. One of the biggest risks associated with real estate is the real estate itself. There are several factors that can put your investment at a higher risk, including:
- Neighborhood decline
- Flood-prone buildings
- Older buildings
- Buildings in need of major repairs
- Jobs at risk in the area
If a neighborhood is declining or at risk, then investing in real estate in the area is not a wise long-term investment. If you buy a house in a neighborhood where crime is on the rise, rent is declining, or jobs are at risk, this could be a recipe for disaster.
The same thing goes for buying a building that’s 100 years old with a 25-year-old roof. That’s a ticking ($20,000) time bomb. Anything that could harm your physical property or your rent value that is not covered by insurance should be avoided at all costs.
An example of a great investment would be buying a building, even if it’s more expensive, in a city or a suburb right off of a highway with easy access to public transportation. If it’s near an elementary school, train line, park, or grocery store in a growing neighborhood, it’s worth the extra money.
2. Poor Choice Of Tenants
It’s important to remember there are plenty of laws that may prevent you from evicting a tenant, but very few laws guiding you on how you choose them.
For the laws that do exist, they are about being fair to all tenants once you set your rental criteria (i.e., not discriminating based on personal attributes). These laws do not dictate how to set your rental criteria or what they should be.
For example, there are no laws requiring to you accept or deny prospective tenants with a particular credit score or income threshold. However, once you set your rental criteria, you must to apply the same standards to all applicants in order to comply with the Fair Housing Act.
Having the right tenant screening process is important. This includes credit and background checks, income verification, and references. One bad tenant, especially at the beginning, can ruin your investment.
One tenant could easily cost you $6,000 in repairs and another $5,000 in missed rent and lawyer fees before you’re able to evict them. Then, while you’re spending all that time repairing their unit, you’ll be losing thousands more without a new tenant.
Now, this is a nightmare scenario that I’m describing, but it has happened to many landlords. You want to make sure you’re always bringing the right people into your buildings, because this will minimize your risk of serious damages outside of your own control.
This is particularly true if you purchase an apartment building, where your decisions about rental criteria will be applied at scale.
Of course, if you decide to invest in office space, retail space, or industrial real estate, then you’ll get to rent it out to businesses, which in some cases, could make your life easier.
3. Poor Strategy
It all comes down to the basic understanding that real estate investment is a business. If you believe you can buy a building and forget all about it, then you will not go very far in this industry.
However, if you keep up with maintenance, find the right people, use technology to market your property, and stay on top of your investment, you’re bound to make money over long periods of time.
Of course, there will be market fluctuations and economic cycles that affect the short-term value of your property. But, the monthly cash flow you collect from tenants will ensure sure you can hold your real estate through the downturns. Over the long haul, inflation will drive up the price of your assets.
Put simply, what’s the best investment on earth? Earth. Well, earth with a cash flow producing property on top of it, that is.
Becoming A Savvy Commercial Real Estate Investor
Okay, now that we know some of the biggest mistakes you can make in the industry, let’s talk about some ways to maximize your investment. Remember that, like with most skills, once you have some experience and you find your groove, it becomes second nature.
1. Communicate
You have tenants, you have contractors, and you have lenders or investors. One of the keys to success is communicating effectively and making sure that everybody is on the same page.
Your tenants will appreciate you providing them with updates and asking for feedback, and your contractors won’t forget about you if you remain in contact about upcoming jobs.
2. Have The Right Tools
We’re in the digital age. It’s important that you have the right commercial real estate software to make your business as productive as possible. If you’re looking to make real estate management more efficient, look into tools like Office Control, which are used for investors and managers to take control of operations and increase their productivity.
If you have software to handle room reservations, maintenance, analytics, and visitors, then you’re far ahead of your competition. There’s no sense in hiring a property manager to take most of your profits if you can handle it all on one platform.
3. Keep Track Of Your Finances
You will have to spend money on income and property taxes at the end of the year, so make sure you are saving a portion of your rental income for that. Also, keep money handy in case you need to pay for an unexpected expense. A water heater can break at any moment. Or, you may have to replace a commercial roof, which can be a major investment.
The more you stay on top of this, the more you’ll be able to earn in the future. Commercial real estate is notorious for multiplying: one turns into two, which can turn into 10 pretty fast.
However, that’s only true if you’re keeping goals in mind and tracking your income and expenses meticulously. If you’re buying your first property now, you could have 3 more within a few years if you manage it right, which will lead you to an early retirement.
4. Security First
Sometimes, you may be tempted to take the extra payment, push off something that needs to be done, or avoid something altogether. You need to constantly be thinking of your commercial real estate as a long-term investment and not just a paycheck for next month.
If you need to be without a tenant for an extra month so you can do some extra work in their unit, do it. Speaking of security, always collect security deposits from your tenants! You’ll be glad you did.
5. Assess Market Trends
Trends change all the time. If you’re a frequent consumer of news, then this is the industry for you. If not, set up alerts on your phone for news involving real estate or follow some real estate blogs.
It’s important to know what to expect in the coming months. If you aren’t up to date, you will be surprised when you can’t find a new tenant to fill your vacancy or when rent prices start declining in your area.
Currently, there is a residential housing shortage in the U.S., which is driving up rental prices. If you didn’t know this, then you wouldn’t be able to adjust your rental prices to be in line with current market rates.
Remember, knowledge is power, and it’s best to prepare yourself.
Your Investing Journey
One of the best parts of commercial real estate investing is that loans for these properties are issued based on the property’s ability to generate income, called “Net Operating Income” or NOI.
This means you don’t have to personally qualify for each mortgage.
This is incredible because it means you can more readily stack commercial real estate investments, as compared to single family homes where the mortgage lender requires you to personally qualify for—and guarantee—every single loan.
Simply put? Now that you know how to become a successful commercial real estate investor, there’s no reason not to get started!