Pro Advice on How to Invest in Commercial Real Estate
In general, most investors understand that it is better to hold an asset over time than to jump in and out chasing gains. In this respect, CRE can provide solid, predictable returns. Investors in commercial real estate typically receive steady cash flow for their investments, with income generally distributed annually, quarterly, or even monthly. That’s because high occupancies and predictable rents often provide a steady cash flow that most investors are looking for.
Every seasoned investor is aware of the fact that it is better to hold an asset over a certain period rather than just jumping in and out in other forms of investment while chasing a good amount of ROI. The best thing about commercial real estate investments is that they usually provide investors with predictable and solid ROI. With commercial real estate investments, you can be assured of stray cash flow since income earned can be distributed monthly, quarterly, fortnightly, and annually. So, now that you have decided to invest in commercial real estate, rest assured that you have made the right decision. To start, here is some helpful pro advice that you should keep in mind.
Consider Investing in Other Cities or States
Some real estate investors have this common belief that the best real estate investment should be the one that is just right in your backyard. There is indeed benefit to having a complete understanding of the area where you plan to invest. However, if you solely focus on an area near you, you will only be limiting your potential to reap more profit if you concentrate on a small geographical area alone.
Do not just focus on acquiring real estate assets within your neighborhood or geographical location. However, this move spells convenience and comfort because you are pretty much familiar with the local market. However, if you concentrate all your real estate investment in one market, the chances are high that you are going to suffer from serious risks when an economic downturn occurs. Therefore, it is best to invest in commercial real estate in other regions outside of your own.
Investing in other cities or states would lead to a larger pool of opportunities than when you invest in a small geographical area only. When you have investments in a large geographical area, it will become easier for you to diversify your investments. Besides, this will also serve as your protection in case the local market becomes too volatile.
Aim for Diversification of Your Investment Portfolio
Portfolio diversification is a must. This is true, regardless of whether you’re a budding investor or a seasoned one. Consolidating all your funds in just a single type of investment makes you too vulnerable whenever an economic downturn occurs. An unexpected loss is already enough to ruin your entire investment strategy. On the contrary, when you diversify your holdings, you will be able to equalize your risk. This prevents your investments from being ruined when one source of loss takes place. Not to mention the fact that it is through diversification that you will be able to increase your chances of gaining higher returns.
The good news is that there are several ways to diversify your portfolio. Investing in commercial properties is also another great way to diversify your portfolio. Commercial properties have fewer competitions compared to residential properties, yet are capable of giving you better ROI. You may opt for REI Investment, serviced accommodation, social housing, and off-plan properties. You may also invest in holiday homes like villas that can also provide you with exposure to other country’s markets.
Avoid the Tendency to Over-rehab
When investing in commercial real estate, remember that everything doesn’t need to be quite expensive. High-end houses may have the most expensive countertops and other fixtures. But, lower-end houses do not need to have the most expensive furniture. Keep in mind that each residential or commercial establishment you bought should be turned into a profit yielding property. This goes to say that every decision you make in terms of rehabilitation, that property should consider profit margins. Failing to have this kind of mindset could have your real estate investments short-lived.
Never make any attempts to buy a property without first making estimations regarding the repairs needed to be done. Do this with the help of a contractor. Also, never start rehabilitating any property without enough budget. When creating a budget plan for your rehab efforts, do not forget to leave room for any overages and unknowns. Then, see to it that everything is done according to the set budget plan, as much as possible. See to it that you finish the project without sacrificing your chances of making a profit out of it.
Look for Rental Properties in Emerging Neighborhoods
Rental properties are one good way to engage in real estate investment. Look for these kinds of properties in emerging neighborhoods so you can maximize your chance to earn a profit. These emerging neighborhoods are good sources of excellent opportunities not only to budding investors, but they are also good for experienced investors. These kinds of properties usually have modest acquisition costs, yet they are capable of providing a significant amount of appreciation potential. In turn, investors will have more chances of gaining a stronger and higher return on investment.
However, if you are a novice investor, make sure that you know how to completely identify an emerging neighborhood. Know what criteria to set and what data to use. In terms of analyzing criteria for considering an emerging neighborhood, these should include area profile, growth factor, and demand.
In terms of demand, conduct a survey to determine whether there is enough population that can support the need for rental properties. Try to find out the proportion of prospective buyers to prospective renters. The next important thing to consider when choosing emerging neighborhoods to invest in is the presence of a significant event that will add value to that certain neighborhood. These could include a recently completed project that is bound to impact property values. It could also be a project that could transform the many lives of people out there. You also need to take into consideration the availability of transportation and the average age of the majority of buildings there.
The truth is that commercial real estate investments are not for everybody. The good thing is that when inflation rates occur, you can increase the cost of rent in your property, and this helps ensure that you will still gain enough profit. On the contrary, when you invest in stocks, inflation rates could subject you to yield diminishing returns.
