How Commercial Real Estate Works
This is How-To's, How Comes, And What Are's, where we answer the most common questions about commercial real estate asked around Orange County.
Today's question is:
How Does Commercial Real Estate Work?
Imagine the stock market. You have several different ways to invest, right? You can pick stocks yourself, put your money into a fund, or listen to advisers and choose stocks based upon their recommendations.
Commercial real estate works the exact same way, only you're purchasing physical assets instead that can provide better returns, better tax incentives, and ultimately more flexibility. We'll break it down into quick and easy steps to help you get a feel for how it all works.
Step 1: Funding Your Investment
You have a multitude of options to raise capital to purchase commercial real estate. The main three involve purchasing the property for cash outright, putting down a down payment (lenders require a minimum of 20% down), or raising capital from friends, family, and business partners to buy the property outright or meet the down payment requirement.
Because every investor is unique in their long-term goals, there is no "winning" strategy. Each approach has it's pros and cons, and to determine what you want to do, your best bet is to reach out to a lender, investor, or local agent to strategize an approach that will get you returns you'll be ecstatic about.
Step 2: Determining How You Want To Invest
Like funding, you can leverage your money to invest in commercial real estate in a variety of ways. Whether you want the hands-on approach or a passive fund manager to do the work for you, you have those options and more available to you.
Three common investment strategies include:
Purchasing the property yourself/with partners
Investing a sizable amount of funds into a passive crowdfunding REIT (Real Estate Investment Trust)
Investing in a syndication
Each of these strategies could have their own article, and we may write those up later. For now, if you want to learn more about the passive approaches, take a look at well-known investment trusts and syndicators such as Fundrise, AppFolio, or REIT.
Step 3: Determining The Asset Type You Want To Invest In
This is where all investors need to have a solid understanding of asset type performances and determine which one is worthy of their funds. For a quick and easy breakdown of the current state of each asset type, take a look at our recent market update.
The main asset types consist of the following:
Do your research, call local advisors, talk to investors, and ultimately make the decision that you feel the most comfortable making.
Step 4: Invest
This is easily the most difficult stage in commercial real estate investing. It all seems to make sense until it's time to pull the trigger, and that's when most first-time investors begin to double and triple-check their potential investment. This is perfectly normal, and any party associate in your deal will understand that you may want an extra day before giving the final head nod to move forward.
We highly suggest having written out guidelines for the investment, returns, and strategy you're looking for in commercial real estate. If the property meets them, move forward. We see it time and time again where a person will never make that transition over to an investor because they all of a sudden get cold feet. Surround yourself with people that will give you the confidence to make one of the most important, and potentially lucrative decisions on your career.
Step 5: Maintain The Investment
The most successful commercial real estate investors understand that maintaining their properties will ultimately reap the most returns in the long run. This doesn't mean that you need to deck out your property with the latest-and-greatest appliances, tech, flooring, etc. But, this does mean that you should strive to keep both the interior and exterior of the property clean, presentable, and updated.
If the floors aren't hardwood and look dated, you may want to replace them. If the paint on the walls is no longer trendy (like neon colors today), you may want to repaint them. If the HVAC system(s) are well past their normal lives, you should probably replace them.
The ultimate goal in commercial real estate is to have happy tenants. Happy tenants are willing to pay high rents to stay, and high rents equal a higher return for you.
Leave your thoughts down in the comments below, or feel free to schedule a free 15-minute phone call with Wyatt to talk about anything real estate. Licensed in California, working anywhere from San Diego to Orange County, Wyatt keeps in tune across all asset types and loves staying busy, even on weekends.