There are steps you must take before you invest in any property you find on a commercial real estate platform. Becoming a commercial property investor takes considerable effort and time. That said, the journey actually begins when you take the first step. But, what’s that first step? How do you begin your journey understanding that you are placing yourself in the best possible position to obtain solid returns on your investment? This article offers the foremost ‘first steps’ you must take prior to purchasing any commercial property, like a retail strip center, multifamily building, or office space.
1. Do your homework well
There’re a few major differences between residential and commercial property investing – those planning to buy their very first commercial property must know the differences if, they yearn for powerful returns on their investment. Maybe most crucial is the issue of valuation of properties. While the value of residential homes is mostly gotten from studies of comparable properties within an area, the value of commercial properties is derived via the amount of income they generate. Consequently, the tenants in a commercial property – their business models and experience levels – must be studied before making any kind of purchase.
As you are likely to get a loan to help you buy any property, it is also crucial to know how financing works within the commercial property world. This will enable you to understand any industry financial jargons being thrown around on the real estate platform from which you sought the property. In their efforts geared towards the evaluation of the income-generation capabilities of a property, lenders utilize calculations that could turn out new to you.
One predominant metric within commercial mortgage transaction processes is DSCR (debt service coverage ratio). The metric is computed using the gotten Net Operating Income – the after-expenses net amount of income – divided by the property’s debt service (principal and interest payments). The lender’s objective is determining how comfortable they feel lending you money according to the amount of income generated by the property.
2. Begin with the end in mind
Investors who plan for only the initial purchase of their commercial property are getting themselves set up for failure. That is as one among the major keys of successful ownership of properties is a solid exit strategy. What is your ultimate aim? Do you want to complete a ‘fix-and-flip’? Are you looking to pass the property onto future generations?
Length of ownership is a crucial consideration as it impacts the kind of financing you will desire to secure as you buy the property. Investors with long-term visions for their investment might desire to minimize payments using a long-term financing solution – such as a 30-year fixed-rate loan. Conversely, ‘fix-and-flip’ investors might prefer a short-term loan that enables them to swiftly transition to the next opportunity.
Thinking ahead helps as you review potential purchases. For instance, owning a multifamily property could be a truly wise strategy in a rising sector. As the population rises, so will the demand for units in your building.
These listed steps are just the start to buying any property you find on a reliable commercial real estate platform. Contact industry experts to learn more.