How To Start Investing in Commercial Real Estate
Owning commercial real estate can be a profitable endeavor. If you want to invest in a commercial property as part of your business but are not sure where to start, follow the below tips.
- Learn the Lingo
Once you enter the real estate space, you will likely encounter some new lingo. You should first familiarize yourself with common industry terms so you can effectively communicate with others in your field.
One common acronym you will likely hear is DSC, or Debt Service Coverage Ratio. This represents the cash flow remaining after loan payments and other operating expenses have been paid.
Capitalization Rate is another common real estate calculation. It represents the property’s income divided by its value.
- Tour Various Properties and Decide Which Is Best for You
You can do your initial property research online. Start by figuring out what type of building you want to own, and where it should be located. You should also determine if you plan to renovate the property, or if you just want to invest in the building as it is currently constituted. These decisions should help you narrow down your options.
Once you have created your shortlist of properties, you should tour them in person to make sure they are what you expect. This should also give you the chance to ask any lingering questions you have about each building.
- Consider Financing Options
You likely do not have thousands of dollars in your bank. You will probably have to borrow money in order to pay for your commercial real estate investment. Luckily, you have multiple options. You can use a credit union or a bank. You can even start your own crowdfunding campaign.
- Complete Due Diligence
Before you finalize your purchase, you should do some additional due diligence. Make sure that all the relevant documents, including rent rolls and utility contracts, are accurate. You should also order an American Land Title Association survey that confirms the property’s easements and boundaries.
Once you are ready to buy the property, send the landlord a letter of intent. The letter should state your own terms and conditions for payment. This should set the stage for the final negotiations. A neutral escrow officer can then oversee the final transaction.
Entering the commercial real estate industry does not have to be scary. The above suggestions should help you start the process of owning a commercial property.