The 4 Rules You Must Follow To Succeed In Commercial Real Estate Investing
I blame TV.
OK, maybe TV isn’t completely to blame, but the popularity and proliferation of DIY house flipping shows have certainly romanticized the idea of commercial real estate investing making it seem like somewhat of a get-rich-quick scheme. Far from it.
In my experience, there is no such thing as get-rich-quick. Sure, commercial real estate can help you build wealth, but it isn’t quick and it certainly isn’t easy. Not only does investing in commercial real estate require a lot of time and effort but also requires quite a bit of experience and market knowledge—and no, reading one real estate book and attending one real estate investment course does not provide you with the knowledge base you’ll need to be a successful commercial real estate investor. But don’t worry, not having the experience or knowledge to invest doesn’t mean you can’t, it simply means you need to be smart about it.
For novice and professional investors alike, adhering to the following four steps will help give your commercial real estate investment the best possible chance of success.
Step 1: Do the work
Commercial real estate (no matter how good a deal the listing agent told you it was) is not a lottery ticket nor is it passive income—you’re working for every dollar. Succeeding at investing in commercial real estate requires a tremendous amount of time and effort (I know as I’ve both succeeded and failed, and I know what it takes to succeed—learning from my mistakes is much cheaper than learning on your own!).
Think of commercial real estate investing like a math equation: On the left side of the equation is your time and effort and on the right hand side is your investment return. In most cases, the equation will balance meaning that the more time and effort you devote to your investment, the better your return will be.
Time + Effort = Return on Investment
If you don’t have the time or desire to commit to the work required to succeed then forget about direct investing and put your money into a real estate investment fund and let someone else do the work (and of course, pay them for the pleasure).
Step 2: Do your homework
In this case, your ‘homework’ will be to find out as much about the general market and the specific asset class as possible and then thoroughly evaluate properties that look attractive (for more information on quickly and efficiently evaluating commercial investment properties, download our free ebook here).
The information you need to find the right investment property can be overwhelming. You will need to consider pricing, cost base, vacancy rates, interest rates, cap rates, and much more. You’ll also need to know how to efficiently evaluate the state of industrial, retail, or office buildings sometimes with only one initial tour. And that’s just what’s required to identify attractive prospects!
Once you’ve found the right property, then the due diligence process starts. This can be a daunting and time-consuming task but is absolutely necessary. If your head is spinning at the thought of all the knowledge you’ll have to acquire in an impossibly short time frame, not to worry, the next step is for you.
Step 3: Get help
Even the most seasoned commercial real estate investors rely on a team of experts to help make the best investment decisions possible. In my case, I’ve been investing in commercial real estate for over 30 years and still rely on the advice of the amazing team I’ve amassed. For starters, I have a great lawyer, excellent accountant, and in my opinion, the world’s brightest property manager. This incredible team has earned/saved me way more money than I’ve spent on them as they’ve kept me from making some very bad investments and encouraged me to sign on some very lucrative ones.
Real estate investing is a team sport, so stack your team with top-notch players! If you’re not sure where to start, reach out to a commercial real estate agent with experience in commercial real estate investing to help get you started on the right track. MCRE has a whole team of competent, experienced agents ready to help you, reach out and start the conversation!
Step 4: Don’t underestimate
Underestimation of how much it will cost to actually own a commercial real estate investment is a common mistake made by both beginners and seasoned investors alike. Most people new to investing will underestimate everything from the time required to get a mortgage, to the time it takes for a roof inspection, to how much additional maintenance costs such as snow removal will take away from the bottom line. In my experience, underestimating what it actually costs to own and operate a commercial real estate investment is one of the biggest reasons novice investors fail. It can also be a trap for seasoned investors who may become enamoured with a property and put proverbial blinders on to any red flags (this is why having a crack team that isn’t afraid to tell you you’re wrong is so important!).
When investing in commercial real estate, whether it’s your first time or your 100th, always be conservative in your estimation. Perform your analysis and then add a 10% contingency on almost every item. By hoping for the best while planning for the worst you are likely to be delighted when things go well and prepared when they don’t.
Planning Your Next Commercial Real Estate Investment
You now have the four-step plan that will help you make the best decision possible when it comes to investing in commercial real estate. Investing in commercial real estate can be a highly exciting and rewarding experience when done properly, so go forth, explore, and conquer!
If you’re in need of an experienced commercial real estate agent on your investment team, make sure to reach out to the team at MCRE for a complimentary consultation.