What You Should Know About Commercial Real Estate Investing
Did you know that most of today’s millionaires and billionaires are also real estate investors? Many even invest in commercial real estate. If you have considered investing in commercial properties, whether you have residential property investments or not, there are a few things you should know before you take your first step.
How You Earn Money
Like residential properties, you can earn money in a number of different ways when you invest in commercial real estate. First, you can earn monthly rental income. This income can be used to pay your mortgage or other financing, costs but if it exceeds your debt service and operating expenses, you may increase your monthly cash flow.
Your properties should also appreciate in value. Not only does paying your loan increase your equity, but you receive additional equity as your property value increases. Most real estate appreciates over time simply due to the scarcity of these resources. However, adequate research is required for any purchase to gauge the prospective appreciation value.
Types of Commercial Properties
Commercial property comes in a variety of forms. You may purchase office, retail, warehouse or manufacturing spaces. However, multifamily homes, from apartment buildings to duplexes, are also considered commercial investments.
Investment Potential Measurements
Before you purchase any property, you should measure its potential return on investment. If you financed your purchase, you need to know the debt service cost. These include your mortgage payments. Then, calculate your net operating income, which is your expected annual revenue after operating expenses. Your internal rate of return is can reveal how profitable an investment is over the long term based. Finally, you should calculate the capitalization rate, which is your annual rate of return. It does not account for any debt you owe on the property.
When you are ready to purchase commercial property, you can adopt several strategies. For example, you could purchase land that you may later develop. You may go so far as to gather permits and change zoning for these developments, even if you don’t plan to complete them right away. You may also purchase apartments that you plan to renovate, building equity through increasing the value of the property. Some properties, such as old factories or warehouses, can also be purchased with the expectation of future population growth in the area. These properties can be rezoned and redeveloped into apartments or retail spaces.
Learn about the commercial real estate investment industry and process to better prepare yourself for your first investment.