Commercial real estate investing may seem intimidating to start, and yes, the risks are higher. So too are the rewards. Property has always been considered a
What are some tips and tricks for investing in commercial real estate?
This answer is mostly focused on multi-family rental properties (5+units).
The following is merely a small list of some “tips & tricks” and not comprehensive advice. Nor should you invest without consulting with competent legal, financial, and market specialists even when you are confident in your knowledge and experience. Real estate is a very high stakes game:
Commercial real estate is a lot more accepting of creative negotiations and financing than residential and deals can often be quite complex.
Learn about cap rates and what your local cap rates are. There is a tradeoff between high-income potential at low cost and stable/dependable properties in high demand areas.
Beware of properties with individual cap rates that are significantly higher than the market. While it can represent a potential bargain, it can often indicate incomplete or misleading financial information and/or distressed property that is either in a bad neighborhood or needs significant repairs and maintenance.
Always look at operating costs, maintenance, etc.
Go over the current financial records very carefully as it’s easy to manipulate the numbers.
Always ask for a full month’s rent credit at closing.
Don’t bite off more than you can chew when you’re new.
Cash, and cash flow are king. Retain and maintain reasonable cash reserves.
Learn to read and understand financial statements (for real estate it’s not too complex—but it is essential).
Understand debt-service ratios if you finance the property.
Understand that small increases in cash flow (decreasing expenses, raising rents, installing vending and coin-operated laundry machines, keeping all units rented) can have a large impact on property value. (Again, see cap rates)