If you have spent any sleepless nights or have ever been home during the day, you have probably seen those television ads and infomercials for so-called experts who promise to teach you how to get rich in real estate. Before we go any further, let me say one thing: Forget them.
The only people who get rich from those seminars are the people who run them and take money from other people who think they might get rich. Real estate investment can be profitable – especially in commercial real estate but there are legitimate and proven ways to get there. For most investors, success depends on three things:
- Finding a knowledgeable agent or broker with the experience and network to help you succeed
- Asking the right questions to ensure that your investment capital is being put to the right use
- And finally, setting the proper goals based on your comfort level and how much you really want to invest
When you decide to invest in commercial real estate the first step is to find an agent with whom you feel comfortable. Commercial real estate differs from residential not just in the size and costs of the properties, but the uses, the number and types of tenants and a variety of technical aspects that an experienced commercial office will understand.
Once you get past four units, a commercial realtor will have a better understanding of the processes involved.
For instance, make sure your agent understands the capitalization rate (CAP Rate). This is your return on investment (ROI). Everybody does this differently and you can find five different agents with five different formulas.
Don’t get hung up on a number or formula, however if the CAP rate is not at least 7% we will tell you to keep your money in the bank until we find something that meets that goal.
Make sure your realtor understands and explains the Rent Roll, or “profit and loss”, statement on the property. This should be presented to a buyer upon an expression of interest in purchasing it. It will include what the tenants’ pay, what the landlord (you) pays and view of the building finances that includes all expenses and income so you don’t get blindsided after you buy the building.
Ask the right questions when you speak to a realtor and let them know how much you want to invest. And ask yourself that question as well. Are you using cash or financing the purchase? Here’s a tip: Finance the purchase, if possible. Rates are low and you can conserve your own savings for future use.
Some investors might want to start small. We recommend that you find something with at least three units so that if you have a vacancy you still have enough rent coming in to cover your costs. You can find good three-unit properties in the $250,000 to $300,000 range.
If you have $500,000 or more, you might want to consider a mixed-use building. There are many options out there for you that range from multi-unit buildings to mobile home parks to large commercial properties. One of the more profitable investments on the market today, believe it or not, is storage unit facilities.
If you are building a portfolio you might want a little bit of everything, including a corporate center or land lease. The income here might be less but it is usually very stable.
Two final pieces of advice: First, when you interview your realtor, make sure they have their own network. The real professionals have a contact list with lenders, contractors, insurance agents, designers and others who can make your life much easier when you need such assistance. Second, make sure that agent is part of a team for back-up in case they are unavailable.
Put them both together, the team and the network, and you are on your way. That’s when everybody makes money.