By investing in CRE or commercial real estate, you can have a source of passive income and potential high ROI. Usually, commercial real estate is used for businesses. You can categorize the commercial real estate into five divisions- retail, multifamily, industrial, hospitality, and office space. In addition, commercial properties can be further categorized into three classes- class A, class B, and class C.
Step by Step Guideline for Commercial Real Estate Investing
Step 1: Define Your Goal
Before investing in a commercial property, you need to determine the purpose behind investing in the CRE. Also, you’ll have to ask yourself about ROI, short-term and long-term goals, and the impact of the investment.
When you purchase commercial property, you can use it as an investment or personal property. By using the commercial property for personal use, you can have tax benefits and deduct loan interest. Besides, you can increase the equity and sell the commercial property at a higher price. However, when you use your commercial property for personal use, you’ll have to pay all the repair, maintenance, and utility costs.
If you choose to purchase commercial real estate for investment purposes, you can have an annual ROI of around 5% to 12%, which is usually more than residential real estate. Besides, you can have equity appreciation, more cash flow, and tax benefits.
Step 2: Financing
Now that you have defined your goal, you’ll have to inquire about the financing options available to you. When borrowing money, make sure that the interest rate is within your reach. Also, while taking the loan, ask about the possible penalties and fees. Apart from these, ask about the LTV or loan-to-value ratio, collateral requirements, and loan amount.
As you’ll be purchasing a commercial property, you can use a Bridge loan, SBA loan or an agency loan.
Step 3: Make a Team
When you’re investing in the CRE, it’s always better to have some experienced professionals on your side. With the support and guidelines of these expert professionals, you can make the process more efficient and save more money. As a part of your real estate team, you should consider having a realtor, accountant, contractor, attorney, and mortgage broker. Also, if you’re planning to purchase multiple commercial properties or have less time, you can have a property manager on your team.
Step 4: Run Due Diligence
Before purchasing a property, you’ll have to run your due diligence. For example, you’ll have to evaluate the property’s location, assess the property, check the market value, etc. Also, as you’ll be using or renting the property for commercial usage, you’ll have to estimate the probable income from the property. Moreover, you’ll have to calculate the Gross Rent Multiplier or GRM and Value Per Door.
Step 5: Make the Purchase
After checking all the metrics, if the property fits your criteria, you’ll have to make an offer. While purchasing a commercial property, you can negotiate terms with the purchase and sale agreement and LOI. For this task, you can take help from your attorney. Also, before making the deal, consult your accountant about the tax consequences.
