3 Most Important Factors for CRE Investing

Investing in commercial real estate is one of the best ways to diversify your portfolio and grow it in a healthy way over time. Having said that, after you’ve decided to invest in CRE, there are several important factors to consider. 

Considering the factors below will not only help create a rock-solid foundation upon which you can build, but it will also help you better understand the current market conditions.

1. Your Current Financial Situation

One of the most critical things to consider when investing in commercial real estate involves conducting a thorough assessment of your current financial situation.

Commercial real estate is an investment in the truest sense of the term. You’re not in it for overnight success. You must acknowledge you’re in it for the long haul. That means not overextending yourself during the initial parts of this process.

While the market is unpredictable, invest less today. You can add more properties and enjoy a healthy expansion. Don’t go “all in” if you cannot afford to do so.

2. Proper Research

Another critical step when investing in commercial real estate involves conducting thorough market research before you make any decisions. The research includes not only collecting information about the larger real estate market but on the specific area that you’re thinking of investing in as well.

Every location is different – each has quirks. Look at market research from the last five years and see what trends you can spot. If an area is on-the-rise and is growing steadily, it’s a good sign you’re looking for a solid investment. If you sense that things have peaked in a particular location, you may still be able to invest, but it may not grow as quickly as you’d hoped.

None of this is to say that there are times when you shouldn’t make this type of investment. Far from it. Market research will not only help you make better and more informed decisions, but it will also help get your expectations in order as well.

Also, it’s essential to note that this type of research is not something you “do once and forget about.” Market conditions can change rapidly, and staying on top of them can help identify opportunities when you should double down on an existing investment or get out of a particular market before things turn for the worst. You always have to be proactive about these things for the best results. 

3. The Valuation of a Property

As you move ahead, you’ll also want to place a particular emphasis on the valuation of a property. Valuation is critical because it will impact your ability to finance the purchase and other factors like insurance costs and even the level of taxation to which you’ll be subject. These factors will also directly impact the terms and conditions of any investment property loans that you take out – something that will tie back into the amount of money you can make from the property.

In general, this is something that you can do in a few different ways. One involves the sales comparison approach. Look at the recent sales of similar properties in the area (also commonly referred to as “comps”). Make sure you look at a property with similar features and characteristics. Examine both new and old properties. This investment of time will indicate what a fair market price (and one that will yield the highest return on investment) truly is.

You can also take what is called the cost approach. This method looks at the total cost it would take you to purchase the land and construct the building if you were dealing with a brand-new property. Be sure to subtract depreciation for the most accurate number, of course.

Finally, you could look at things from the perspective of income. How much money can you reasonably expect to rent if you’re purchasing commercial real estate to rent out to a tenant? If the amount of money you can bring in exceeds the amount you’re paying for the property every month, you’re likely looking at a good investment opportunity.

In the End

These are just a few of the many factors you must consider when entering the world of commercial real estate investing. Others include the supply and demand of properties in a particular area, the current loan rates, the rates of foreclosures in the area, and others. Many of these things can change rapidly, which is why it is pivotal to do your due diligence. 

As is valid with any investment, there is a certain amount of risk inherently involved in CRE. But provided you keep elements like those outlined above in mind, you’ll be able to enjoy all the benefits of this process. Additionally, you’ll avoid potential downsides.