The Savvy Beginner's Guide to Commercial Real Estate Investing in 2024

You already know I’m a big believer in commercial real estate investment (CREI). I’ve used this investing strategy to build companies and my own personal portfolio.?

I’ve seen firsthand how commercial real estate provides so many opportunities for savvy investors. While it may seem like a complex world that’s best left to experienced professionals, beginners can do very well in real estate if they are armed with knowledge and the right strategies.?

In the interest of ensuring your investing tool belt is full, I’ve developed this Beginner’s Guide to CREI. Let’s walk through the fundamentals of commercial real estate investing so the process is less mysterious, and you feel empowered to make solid investing decisions.

Step 1: Understanding Commercial Real Estate

Before diving into the world of CREI, let’s cover the basics. Commercial properties differ from residential ones in that they are primarily used for business purposes. These properties can range from office buildings and retail spaces to industrial warehouses, large apartment complexes, and even hotels.

Key Commercial Real Estate Categories:

• Office Space: Includes office buildings and business parks.
• Retail Space: Encompasses shopping centers, malls, and standalone retail properties.
• Industrial Properties: Comprises warehouses, manufacturing facilities, and distribution centers.
• Multifamily Housing: Includes apartment complexes and residential buildings with five or more units.
• Specialized Properties: Covers hotels, healthcare facilities, and self-storage units.

Step 2: The Benefits of Commercial Real Estate Investing

Why should beginners even consider commercial real estate as an investment option? Aren’t there easier ways to make money in this market??

The advantages to CREI are unique:

• Income Potential: Commercial properties generally offer higher rental income compared to residential properties, making them a consistent source of passive income.
• Diversification: Commercial real estate provides diversification in your investment portfolio, reducing exposure and risk.
• Long-Term Appreciation: Many commercial properties appreciate over time, potentially yielding both cash flow and profits upon resale.
• Leverage Opportunities: CRE investors can leverage their capital by obtaining financing for commercial properties, increasing their potential returns.
• Tax Benefits: Commercial real estate offers several unique tax advantages, including deductions on mortgage interest and depreciation.

Step 3: Evaluating Market Trends

Successful commercial real estate investing requires a good understanding of market trends and dynamics. Here are some key considerations for you and your trusted advisors to evaluate:

• Location Analysis: Research areas with strong population growth, economic stability, and low vacancy rates. Proximity to transportation hubs, as well as goods and services, also plays a crucial role.
• Supply and Demand: Evaluate the balance between supply and demand in your market. Oversupply can lead to reduced rental income and property values.
• Economic Indicators: Monitor economic indicators like unemployment rates, GDP growth, and consumer sentiment, as they impact commercial property performance.
• Rental Rates: Analyze rental rates for similar properties in the area to determine if your investment can generate competitive income.
• Demographics: Consider the demographics of the area, as they influence the types of commercial properties in demand. For example, an aging population may create a need for healthcare facilities.

Step 4: Financing Your Investment

Financing your commercial real estate investment is a critical step for first-time investors. Unless you have a pile of cash looking for a home, you’ll need to partner with a lender.?

Here are four popular financing options to explore:

• Traditional Loans: Secure a mortgage from a bank or credit union, offering fixed or variable interest rates and various term lengths.
• SBA Loans: The Small Business Administration provides loan programs tailored to small business owners looking to purchase commercial real estate.
• Private Lenders: Private lenders or hard money lenders offer short-term loans with higher interest rates, often useful for quick acquisitions.
• Equity Partnerships: Consider partnering with other investors or real estate firms to pool resources and share the financial burden.

Step 5: Performing Due Diligence

Due diligence is a critical phase in commercial real estate investing. It involves thoroughly researching and evaluating a property before making a purchase. This is certainly a step where I recommend you involve trusted advisors, such as a real estate broker, banker and/or contractor.?

Key factors to evaluate include:

• Property Inspection: Hire a qualified inspector to assess the property's condition, identifying any potential issues or repairs needed.
• Financial Analysis: Review the property's financial records, including income statements, expenses, and tax returns, to assess its profitability.
• Lease Agreements: Analyze existing lease agreements to understand tenant obligations and potential risks.
• Zoning and Compliance: Ensure the property complies with local zoning laws and regulations, and confirm its intended use aligns with your investment goals.
• Environmental Assessments: Conduct environmental assessments to identify any contamination or hazards on the property.

Step 6: Secure Experienced Property Management

Unlike residential real estate, where first-time owners may choose to manage the property themselves, most commercial real estate investments require experienced property management to ensure returns are maximized and the value of the property is maintained.??

My work in the property management industry over the last decade has shown me again and again how important it is for owners to partner with a trusted property manager. You’ll sleep better at night knowing a qualified professional is managing your investment.?

Here’s what they will be tackling on your behalf:

• Regular Maintenance: Implement a maintenance plan to keep the property in good condition, ensuring tenant satisfaction and compliance with safety regulations. Deferred maintenance can become a costly strategy, so relying on your team's expertise in developing a maintenance plan will be critical to your success.
• Lease Management: Maintain accurate lease records, track rent payments, and address tenant issues promptly. Tenant relations is an important and often under-valued part of the business. Ensure you and your property management have good relationships with your tenants.?
• Market Your Property: Continuously market vacant spaces to minimize downtime and maximize income. A quality property management team will have a running list of leads and contacts who may be interested when space becomes available.?
• Tenant Selection: Carefully screen and select tenants to ensure they align with your property's objectives and financial stability, as well as their potential neighbors in the development.?

Step 7: Risk Management

Like any investment, commercial real estate carries risks. From changing world economics to global pandemics to the regional job market and even weather patterns…any number of factors can impact your investment.?

I think about mitigating my CREI risks through:

• Diversification: Avoid putting all your capital into a single property. Diversify your portfolio across industries and investments to spread risk.
• Insurance: Build a relationship with an insurance broker you trust and ensure you have the right amount of comprehensive insurance coverage to protect against property damage, liability, and other unforeseen events.?
• Legal Counsel: Consult with legal experts to draft strong lease agreements and address potential legal issues proactively. I have found it to be far less expensive to invest in legal advice at the front end of a contract negotiation rather than waiting for potential litigation to engage an attorney.
• Ongoing Market Research: Continuously monitor market trends and adapt your strategy to changing conditions - both in your local market as well as the region, country, and global economic conditions.

Since you’re already a savvy investor, most of these steps will be familiar to you. Whether you’re in the stock market or other types of investments, you’ve likely already gathered a team of advisors, evaluated risk, and diversified your investments.?

Commercial real estate investing follows the same learning curve. I have found it to be a profitable venture for beginners who take the time to educate themselves, conduct research, and make informed decisions.?

By understanding the fundamentals of commercial real estate, evaluating market trends, securing financing, conducting due diligence, implementing effective property management, and managing risks, you can launch a successful investment career in CRE.?

For more information on commercial real estate investing and property management in the Southeast, contact SVN Second Story or call us directly at 423-682-8241.?