Commercial real estate investing has been around for decades, but it’s still one of the most lucrative ways to earn a passive income. CRE investing is not easy and it’s not for everyone, but if you’re willing to put in time and effort, there are few better investments than commercial property.
In this article, we’ll cover how you can get started with commercial properties, as well as some tips that will help your success.
1. Understand How Commercial Real Estate Is Different
Commercial real estate is different from other investments in several ways. In commercial real estate, you will have to manage landlord-tenant laws, contract disputes, and dilapidated buildings. If you’re going to get started in CRE investing, you’ll need to be able to manage these issues and know when it’s time to walk away from a bad investment.
2. Learn to Analyze Comparables
One of the most important steps in becoming a commercial real estate investor is analyzing comparables. If you are looking to purchase an existing property, this will be even more essential.
3. Build and Follow the Right Metrics
Understanding your investment goals is the first step in finding success with commercial real estate investing. The best way to keep track of these goals is by following a predetermined set of benchmarks, typically referred to as “success metrics.”
- Net Operating Income: This metric refers to the gross operating income less vacancy and collection losses.
- Cap Rate: The capitalization rate is the ratio of net operating income to property value.
- Cash on Cash: Refers to the cash flow from operations, with a higher return translating to increased profitability.
4. Avoid Early Mistakes
There are several mistakes that new CRE investors can find themselves making, such as:
- Not understanding that cash flow is the most important metric to look at before purchasing a property
- Not thoroughly analyzing comps to create realistic expectations of your future income
- Excessively focusing on the potential appreciation value of a given property rather than focusing on the long-term income capabilities
- Jumping into investments without properly learning about risk and return