Posted by Pamela Swift in How-To Guides
Any savvy real estate investor will tell you that commercial property can turn out be a lucrative investment, provided you take the time to learn the ropes and work out the best way to get into it.
Here is a step-by-step mini guide that covers the key points you need to consider if you want to grab a piece of the commercial property action.
Plenty of questions
If you are considering investing in commercial property, there should be plenty of questions that you will have and need to ask yourself before committing yourself to a deal.
Getting to know some people like JGM Properties commercial real estate, will help you to keep your finger on the pulse and know what is available and what is in the pipeline. You also need to clarify what sort of commercial property you are actually interested in, as well as deciding what you want to do with it after you have acquired the building.
Commercial property comes in many different forms and sizes, you may decide that you are interested in industrial units, office developments or retail space.
You might also want to acquire a commercial property simply to generate some rental income and capital growth, or it could be that you have some ideas to redevelop a site and build something else in order to generate a profit that way.
Make a long checklist of requirements and answers to some salient questions, so that when you start your search, you know exactly what you are looking for.
Get to grips with the language
Commercial real estate investment comes with its own set of terms and a language that you may as yet be unfamiliar with.
Getting to grips with the vocabulary used as well as the acronyms employed on a regular basis, will help you to understand what some people are specifically saying to you without the need for further clarification, and it can also help you feel more at home in the environment.
Knowing what a Loan-to-Value (LTV) ratio is or what the DSC means, will be a worthwhile education in your commercial investment career.
LTV is simply the figure that represents the amount of money you are asking from a lender or they are prepared to lend to you, in relation to the overall value of the property.
DSC refers to the debt service coverage ratio. This is a calculation to demonstrate how much of the debt you will be able to cover annually based on the income you are going to receive from the property.
It is also well worth understanding other terms such as Ad Valorem, which is a tax that is based on the assessed value of the property in question.
Let your risk profile define your investing strategy
If you are considering investing in commercial property, you already have a certain level of risk tolerance, but it is important to be honest with yourself and define the level of risk that you are prepared to tolerate.
Not only does it help to define what your level of risk tolerance is, but getting the answer to this question will help you to create an investment strategy that is in line with this profile.
For example, if you are a bit of a maverick risk-taker, you may well consider some investment opportunities where the rewards are high, but the risks are greater. If you are particularly keen to try to protect your capital as best as possible, you might be looking at investing in a property where there is a long-term quality tenant in place and regular income is the name of the game.
No room for emotions
Commercial property investing is primarily about displaying a good level of patience and keeping your emotions in check.
Homeowners can become blinded by their infatuation for a certain house that they decide they must try and buy at all costs, sometimes living to regret that rush of blood at a later date.
With commercial property, you will not be living there and you need to always a adopt a businesslike attitude to each proposition. You are not trying to fall in love with a property, you simply want to know if you can get involved at the right price, it fits your investment goals, and the numbers work.
There is often no room for emotions when it comes to investing in commercial property. Get that right, along with the other fundamentals, and you should improve your odds of success.
Eli Russell is the leasing and marketing director at JGM Properties. He’s been with JGM for 14 years, and is one of the top leasing agents in Minnesota when it comes to volume of leases signed for office, warehouse, and retail space for rent or lease in Minnesota.