Owning Commercial Real Estate can change your life and the lives of your loved ones. No other investment vehicle is as dynamic or has the potential to create new generational wealth. The incredibly high financial upside is due to the variety of available commercial properties and assets, which increases the likelihood that you can find a property with the potential for HUGE PROFITS in almost every market.
Like any investment strategy that you choose, it would be foolish to think that the Commercial Real Estate industry is free of all risk. Before exposing the life savings of your friends and family to a bad real estate deal, be sure you understand the major pros and cons of commercial investing.
The three main areas we will consider today are: Financing, Property Management, and Risk.
Financing
Financing is the most important part of any real estate transaction. Commercial Real Estate can be financed in hundreds of ways and knowing how to structure your purchase can mean the difference between a mediocre deal and a great deal. You don’t have to use your personal life savings to fund a purchase.
Pros
Finding the financial structure that benefits YOU, the investor, is the key. Because Commercial Real Estate is not a “one-size-fits-all” industry, there are many more options for first time and veteran investors to acquire a property with little to no money down.
Should you look for a seller financed deal? A wrap around mortgage? Should you take a six-figure check out at closing to help you repair the property? There are many financing options that reduce the barrier to entry into this incredible industry that enable YOU to change your life and the lives of your loved ones.
Cons
With great power comes great responsibility. Just because there are so many financing options, doesn’t mean they are all equal. Choosing the wrong financing option can eliminate your profit potential and reduce your passive income to practically nothing. Monitoring interest rates, fees, and other transaction costs is key to insuring that YOU—and not the bank–earns the profits from your hard work.
At CommercialAcademy.com you can find all the software tools you need to help you do a complete financial analysis and evaluate your property acquisition before you buy.
Property Management
How much should you charge your tenants? Should you reinvest your profits into property improvements? How should you structure your lease? Should you hire a property manager?
These are common questions every Commercial Real Estate investor must answer. Commercial property management can be as hands-on, or as hands-off, as you like.
Pros
Can you really earn cash without managing or doing anything? The answer is absolutely yes! Passive income is a reality for many Commercial Real Estate investors. How much passive income you can earn depends on your portfolio and the types of properties you own.
Because Commercial Real Estate often has higher property values, many investment options offer the latitude to hire a property manager. If, for example, you purchase a 30-unit apartment building, you can offset the salary of a property manager by offering a rent-free unit in the complex. Alternatively, you could hire a 3rd party property management company to take care of your asset. When problems come up, it is the job of the property management company to take care of them.
In addition, you can deduct the management costs of your property from the income statement, which has certain tax advantages. You can make these decisions based on how much effort you want to invest in your assets.
Cons
On the other hand, sometimes problems do come up that are beyond the scope of your property manager’s skillset. At the end of the day, no third party will maintain the property and the client relationships with the same enthusiasm that you will as the owner.
For example, if a tenant in a retail mall property is struggling to make their lease payments, it will be up to you as the owner—not the third party management firm—to figure out the best outcome. Your investment strategy for the strip mall may depend on maintaining an occupancy threshold, in which case a strategic renegotiation of the lease agreement may be a benefit to both you and your tenants.
However, if your retail site is in a highly desirable location and you can lease to a better tenant, discerning an exit strategy could be the best option.
One of the risks of owning Commercial Real Estate is not properly managing the assets in your portfolio to achieve your investment strategy. As the principal investor, you must be the one who maintains the vision for your investments, which could entail some difficult decisions and negotiations.
At our Commercial Academy LIVE Events, we teach you how to identify an investment strategy, evaluate properties that could be the right fit, and maintain a vision for long term growth and profit. Not every deal is worth pursuing, and before you invest your hard-earned money, you should be sure that the asset meets your personal strategic criteria.
Risk
The way financial institutions offset risk is with higher interest rates. A low-risk loan will often carry a low rate of return for the bank, but a high-risk loan will be priced accordingly.
The risk involved in Commercial Real Estate won’t always be indicated by the mortgage interest rate you receive from the bank. Unforeseen events happen, and circumstances change. The good news is that this can play in your favor.
Pros
All well-run businesses accommodate for risk. If one of your tenants is a reliable business, they will likely want to sign a long-term lease. The average Commercial Lease lasts between 3 and 5 years. This time period greatly mitigates the risk you undertake if the tenant chooses to change locations.
Similarly, you will be able to manage risks to the underlying asset with good property insurance. Unlike residential properties, the underlying property is treated strictly as an asset that generates a rate of return. Underlying property conditions should be assessed very carefully, and safeguards against undetected risks should be written very clearly into the purchase contract. If a fire or storm destroys the asset, your cash flows can halt immediately. Good property insurance and good contract negotiations protect you in the event of a catastrophe.
Cons
Let’s face it: just because a company was solid two days ago doesn’t mean they’ll be solid two days from now. A saying I learned a long time ago is that everybody’s money is good…until it isn’t. Protecting yourself from risk is a fundamental aspect of designing a good lease agreement, a process that considers many different factors.
Every Commercial property is different. Unlike purchasing a residential home—where there could be 10, 20, or 50 comparable properties to base your valuation on—you will be responsible for assessing all the factors that could potentially affect the value of your property. These could be economic, demographic, physical, environmental, or even political. Before acquiring any property, you must do your due diligence. These discoveries will help you negotiate a fair price, but they could also prevent you from buying a property on the verge of condemnation.
At CommercialAcademy.com you can use our Virtual Visit Tool to help you with your due diligence. This tool enables you to access census data, property views, and many demographic details you will need to make an informed decision about your investment.
The truth is that there will be pros and cons to any investment you choose to make, but in the end, Commercial Real Estate has fewer headaches, better risk protections, and massively higher cash flows than almost any other investment vehicle.
You can learn all the tactics and strategies for choosing the right assets for your investment goals in our courses at Commercial Academy. We are on a mission to help YOU be successful in Commercial Real Estate. Remember, it only takes ONE DEAL, ONE TIME™ to change your life forever.
