What to Know Before Investing in Commercial Real Estate

Are you thinking about taking the plunge and investing in your first commercial real-estate deal?

Even if you’re a veteran investor in residential properties – someone who buys single-family homes to rent, for example, or a house flipper – you’ll need to learn the ropes when it comes to commercial investments.

The commercial real estate market has been on the upswing in recent years, and commercial properties have been seeing some healthy investment yields, with commercial property prices up 10 percent or more in some markets since the start of 2013.

But commercial real estate investing can be a whole different ball game from residential real estate investing, and commercial properties can carry a hefty amount of risk.

Here are commercial real-estate investing tips for first-timers to help you navigate the commercial landscape as a smart, successful investor.

Here are five tips for first-time commercial real estate investors:

Knowledge is power. Don’t rush into a deal. Do your due diligence ahead of time. Make sure you’re knowledgeable about not only the property you’re considering but about the market in general.

It’s all about the numbers. Sure, location matters, just as it does for residential real estate, but the success of any commercial deal is dependent on whether the numbers work. And, to understand the numbers, you need to know the lingo – intimately. Make sure you understand the formulas for NOI, cap rates, and other applicable finance terms. There’s no excuse for not understanding these crucial principles.

Consider all sectors. Many new investors plan to start with small apartment buildings, but multifamily may not present the best upside potential in your particular market. So, consider alternatives, such as retail, net leased properties, or even self-storage.

Think about financing upfront. Commercial loans require a lot of paperwork. It’s helpful to establish a relationship with a lender in advance and to familiarize yourself with the application requirements.

Surround yourself with professionals you can trust– a commercial broker, real-estate attorney, accountant, insurance agent, and general contractor.