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The Basics of Investing in Commercial Real Estate

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No one knows what the future holds so investment is your best way to be prepared for the future. But how do you know what to invest in? Now is a great time to invest in commercial real estate but there are some things that any investor should know.

What is commercial real estate?

First of all, what is commercial real estate? It’s a term used to describe property used to generate a profit, such as office buildings and industrial property. There are two ways to make money from commercial real estate: charging rent and by appreciation in the property’s value over time.

Is it profitable?

With office buildings and industrial property, companies pay rent and lease terms can be as long as five years or more. Apartment buildings are rented out by individuals and leases are usually a year.

The potential returns don’t end there. Appreciation is another way of making money on your commercial property.

First of all, commercial real estate is a good investment because it always has value and it generally appreciates over time.  Commercial property such as an office building in the middle of a major city is usually in high demand which makes it valuable.

However, there is another contributor to potential returns when it comes to appreciation. The “value-add” approach can be an effective approach to increase its value.  An example of “value-add” is making changes to an office building such as cosmetic improvements, new appliances, etc.  These changes allow you to charge higher rent for your nicer offices.

Another perk of investing in commercial real estate is the consistent cash flow which comes with longer leases with tenants. Because the leasing agreements for commercial property are usually signed for multiple years, investors can guarantee long-term returns.

How do I get started?

Okay so now that you know about commercial real estate, how do you get started? First of all, you have to do your research. Actively conducting market research is the most important aspect of investing. The location of the property is a significant aspect to consider. This property is a long-term investment so you want to research future development in the area and analyzing comparables.

What are comparables?

Comparables or “comps” are the price paid for properties similar to your potential property in location, style, and size. This is how you determine the market value of your potential commercial property. The most accurate comparables are made by choosing a property where the square footage does not go beyond 10 percent higher or lower than your potential property. Unlike residential real estate, commercial real estate’s income for investors is directly related to square footage.

Another aspect of investing you’ll need to know is cash on cash returns. This is one of the most common return formats in real estate and it’s generally used by investors who rely on financing to purchase their property. It is a ratio that you get from dividing cash flow before tax, by the amount of equity originally invested.

Another concept you’ll need to know before you get started is the capitalization rate or cap rate. The cap rate is the rate of return on the property based on the income that the property is expected to generate. To get the cap rate, you follow this formula:

Capitalization Rate = Net Operating Income / Current Market Value.

This is how you find the estimate of future profits.

You’re ready for success!

Investors who master these formulas will be much more successful in their ventures and market research is the first step to investing success. These steps will help get you on your way to becoming a successful commercial real estate investor.

Now is as a great time to start and grow your real estate business. Contact the specialists at HML Investments today for more information about Hard Money Loans.

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