Having the right perspective and patience are necessary traits for investing in commercial real estate. Experts say that success in commercial real estate investment requires the willingness to spend a lot of time and effort upfront in doing the research, developing the right relationships and identifying the right type of investment.
Most real estate investors get started buying single-family houses, probably because it’s what we’re 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 follow that will help you achieve more success.
Tip #1: Think big
If buying a small five-unit apartment block 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. In fact it’s no harder to manage 50 units than it is 10. The same applies to industrial property units, offices and retail shops.
Tip #2: Find a strong commercial property valuer
Commercial valuations take longer than single-family valuations do. They take longer to get details and other pertinent information. This is not necessarily a bad thing, but something to keep in mind so that you don’t get impatient or rush into poor financial decisions. Think of a commercial valuation as a key business decision – do not rush into a deal without consulting a reputable valuer whose opinion you can trust.
Tip #3: Don’t only choose apartment blocks as your first step
There’s nothing wrong with investing in residential apartments blocks, in fact in South Africa they are great investments. We are 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, retail centres etc. Weigh up all of these property types 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 previous deals. Houses are so similar that it’s easy to make a cookie-cutter system for buying and selling them. When many new investors begin looking for commercial properties, they are surprised at how long it takes in the beginning to screen deals and bid at auctions. Just remember that there is a learning curve, like with anything else, and that things will proceed faster over time.
Tip #5: Learn new pricing formulas
If you’re bidding on houses, you may use certain formulas, like buying at 85% of current market 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 a good yield in your target market and area and get familiar with them when making offers.
Tip #6: Relationships are even more important
Relationships with other investors and banks are important when buying houses, but they are even more so when buying commercial properties. For one, properties costing a few million Rand or more are probably within the financial wherewithal of most of us individually, but for expensive commercial properties you probably will have no choice but to get to know and work with partners. Also, many commercial properties are sold on auction, so the closer you are to the auction house the more deals you’ll find.
Tip #7: Find good financing in advance
Commercial loans are a different animal to 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 or your partner will have to put more down upfront. Nevertheless, before making offers, ask around and find out who the best commercial lenders are, it may make the difference between qualifying for a loan or not.
Tip #8: Be prepared for proper due diligence
Before you bid at an auction, use the pre-sale period of time (just like with houses) to do your due diligence. You should get a valuation, income details and other pertinent information. Doing proper due diligence takes time and you might spend considerable time on a prospective deal, only to find out you don’t want to buy it after all. This is always better than buying a bad deal and you should always be prepared to do the hard work upfront, it could save you, or make you, a lot of money.
Tip #9: Partners are your bridge to wealth
As we have said before, buying multi-million Rand properties is not something most people can qualify for on their own; in fact, getting a bond to buy a house is hard enough these days! So make sure that you spend a lot of time finding lenders or deal partners to help you out. A partner can provide the cash and/or credit needed to purchase a property, and you can compensate them by paying them a fixed interest rate, a percentage of the cash flow or proceeds from the sale.
Tip #10: Know where to get tough questions answered
Finally, it’s imperative that you associate with experienced commercial investors who can answer questions that come up while you are evaluating properties. There’s no sense in losing a deal or buying a bad property because you don’t understand certain issues or can’t accurately estimate potential rental income. Know who you can ask to get fast and accurate answers when you need them, and make them your new best friends.
By following these guidelines we can’t promise instant success. However, you will have the right perspective about investing in commercial property that will help you start right and stick with it for the long haul. Good luck to you in “moving on up” from single-family houses to the big time.