Investing in commercial real estate is a fantastic strategy to earn extra income and establish a stable cash flow. But diving into your first CRE investment isn’t always easy, and it can take a lot of time to develop the investment savvy and business instinct required to make it in the commercial marketplace. As you plan for your first commercial property investment, check out these helpful tips.
Do Your Homework
While some elements of CRE investment are simple, there is still a lot of industry jargon and bureaucratic red tape to sift through. Learning the lingo and the standard legal processes can help you feel confident you’re making the right decisions for your bottom line and help you hold your own during negotiations.
Need some extra help? We’ve got you covered. Check out our blog posts on different styles of lease agreements, definitions of common CRE terms and our crash course on best practices for listing your property.
Don’t Rush the Process
We know your first investment can be exciting, but it’s important to make sure you keep a level head and don’t rush through the process. Secure stable financing before making inquiries on properties or commitment to investment strategies. We know it may seem obvious, but eager beaver investors will hurt their reputations in the marketplace if they make verbal investment commitments that they can’t back up with financial agreements.
Additionally, don’t rush on your property selection. Take the time to really think about the type of property you would like to invest in and what features it would need to match your business goals and investment strategy. If you don’t find the right investment opportunity right away, talk with our expert team to help expand your search or to discuss ways to think outside the box on your approach.
Lastly, never rush negotiations. They are the most important element of the investment process. Failing to exercise due diligence here opens you up to unnecessary financial and legal risk.
Do Keep Your Eye on the Market Cycle
The CRE market moves in predictable cycles — recovery, expansion, hyper-supply and recession. It’s important to know where the marketplace falls during the time period in which you’re looking to invest, and whether there are any unseen local factors influencing your region, such as an over supply of properties in a particular industry, or local regulations or tax implications that may impact your bottom line. Partner with a commercial real estate expert like NAI to run formal location analysis and feasibility studies that can inform your strategic investment plan. If the market isn’t ripe for your particular strategy, our experts at NAI can help you reconsider different approaches that will maximize your investment in the existing marketplace context.
Don’t Forget to Account for Setbacks
We know that first-time investors can often get caught up in the excitement of their first property. Especially in the early stages of an investment, it is essential to establish a contingency plan for sudden vacancies or downturns in the economic market. Take the time to consider how long your investment property can withstand a vacancy and what steps you can feasibly take to quickly fill vacancies and account for missing income. As a rule of thumb, set aside 5-15% of your cash flow each month to help cover surprise expenses.
Do Make a Long Term Plan
Once you get your first investment property off the ground, you should do two things: 1) give yourself a pat on the back, and 2) establish a long-term plan. Analyze your long-term return-on-investment and establish specific, measurable goals for growth. How much profit do you hope to bring in this year? In the next 5 years? When will you have enough cash to invest in another property? What do you hope today’s investment will accomplish for you in 10 years?
Keeping your eyes on the future will help ensure that you continue to maximize your investment and stay ready for what’s next.
Don’t Do It Alone
The best way to ensure your first investment goes off without a hitch is to partner with the right people. Find local professionals who will help you along the way — a CRE broker, attorney, accountant, insurance agent, and general contractors. Build strong professional relationships with them so you can call on them to help you navigate the ins and outs of the CRE world.
Ready to dive in? Our team at NAI Mid Michigan is ready to help. Contact us today.