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Am I Ready To Make The Transition To Commercial Real Estate Investing?

Written by Paul Esajian

Commercial real estate investing is not for the faint of heart; however, if you’ve done your due diligence, commercial investing can lead to a diversified investment portfolio and the accumulation of long term wealth.

There are six types of commercial properties investors can choose to focus on:

  • Office Space. Is classified based on its location, either CBD or suburban. The square footage reported on office space commercial real estate is the amount of rentable space.
  • Retail Space. Refers to either shopping malls or strip centers.
  • Industrial Space. Large warehouse-type spaces, ideal for manufacturing and distributing .
  • Multifamily Complexes. Are classified as apartment buildings, condos, special care facilities, or any type of multifamily rental property. There are garden complexes or mid/high-rise projects, which are defined as four stories or greater.
  • Hotel. An establishment that provides lodgings, usually for an extended period, and sometimes meals, entertainment, and other personal services.
  • Development Site. Land or an existing structure that is going to be demolished and rebuilt. Typically, development sites have already been zoned for a specific kind of development.

The first step to get you started in commercial real estate investing is to choose your niche. It is important to prioritize your goals and align your strengths before jumping into the commercial sector. If you are a beginner who wants to start small, consider a multifamily complex or office space because those options tend to be the cheapest. You must ask yourself questions like, “how much construction am I willing to take on?”, and “is my goal to flip this property and sell or use it as a buy and hold?” By ranking your needs, you will be able to more easily determine the route you want to take in your commercial real estate investing career.

How To Know If You You Are Ready For Commercial Redevelopment

how to invest in commercial real estate
First, let’s talk about some of the benefits of commercial redevelopment. Owning commercial property ensures a steady monthly income of rent from tenants. Commercial real estate owners also qualify for certain tax benefits like favorable capital gains treatment, depreciation and interest. As owner, you have the ability to control all operating expenses and maintenance, which promotes an image of strength and stability. Finally, the financial leverage acquired through owning commercial real estate, i.e. equity, mortgage loans, etc., is undeniably advantageous for all other future real estate purchases – both residential and commercial.

Do you feel ready to make the jump into commercial real estate investing but are too afraid to take the leap? Not to fear, by asking yourself these simple questions, you will be certain whether or not commercial real estate is for you.

1) Do you have the ability to think big?

  • Investing in commercial real estate requires individuals to think big and have an open mind. When investing in residential real estate, you are typically only forced to think about one thing at a time, or several bedrooms at a time. With a commercial property, you must be able to visualize a finished product even in the beginning stages of redevelopment. You can’t be afraid of size. If you are debating whether to purchase a five unit apartment versus a 10 unit, you might as well go for the 10. If the five unit complex requires the same commercial financing as the 10, there is no point in going through the hassle and not getting the ultimate reward. Don’t be reluctant to think big.

2) Are you an expert relationship builder?

  • Networking and building relationships as a residential real estate investor is important, but it is an absolute must for commercial investors. The biggest reason to build relationships with other commercial investors and private lenders is for financing purposes. But it’s also important for boosting your commercial real estate marketing. When facing a one million dollar purchase price, it is likely that you will be in need of funding, and what better way to find capital than contacting one of your personal private lenders who you’ve already built a relationship with. Expert networking skills are so crucial for beginner commercial investors because it creates an outlet for even the toughest of questions to be answered. There is no sense in missing out on a deal because you were unaware of a specific market’s changes or environmental regulations. Once you’ve built a network, you can rely on other individuals who have made and learned from their mistakes.

3) Can you successfully execute your due diligence?

  • Arguably the most important task beginner investors can do before jumping into commercial real estate investing is performing their due diligence. After you’ve chosen your niche, you must research everything you can regarding that specific sector. Ask questions from like-minded individuals at your local REI club, find information about different types of financing options online, reach out to your private lenders in advance so you know exactly what information to present them with when the time comes. The next step is to investigate your desired market and analyze the current commercial real estate trends. Each building in each market will be different, so once you’ve found a property you want to purchase, go have a conversation with the current inhabitants. Find out what the vacancy rates were with the previous owners. Ask storefront managers what the like and dislike about the professional environment. Inquire about any other development – both residential and commercial – in the surrounding area. Anything you can find that will help to paint a better picture of what the final outcome of your finished property will look like, utilize to your advantage. Once you’ve carried out thorough due diligence, you will be ready to successfully complete your first commercial real estate deal.

Anyone can make the smooth transition from residential to commercial real estate, you just have to be confident that you know what you’re doing – which you will, if you answered “yes” to the above questions. If you use have the systems that brought you success with residential real estate, seamlessly implement them into your commercial strategy, and you will surely make a profit.