Updated: Nov 14, 2022
The broad term describing real property used to generate a profit for its owner is called CRE or Commercial Real Estate. It includes apartments, offices, retail space, and other such buildings. It is also becoming more and more popular as an alternative investment. But, many investors still don’t understand how commercial real estate works as an investment vehicle. When starting, you should clearly think of your finances and how much money do you have to invest in property? Do you want to purchase in cash, or are you going to apply for a loan to increase your investment amount? If you think about a loan, KSB Funding Services LLC can help you with that.
THINGS NEED TO KNOW BEFORE INVESTING IN CRE
When you decided to start investing in commercial real estate, you should consider many things like the property types, market area and supply and demand, understanding market cycles. You should also have a contingency and capital reserve fund and be prepared for setbacks and extended timelines.
There are so many varieties of asset types and CRE has five main sectors such as industrial, office, retail, multifamily, and special purpose. The other property types such as self-storage, medical, elder care, land, or hotel. Because of the asset's location, some property types are better than others based on supply and demand. But, it is not easy to know which asset types are the most profitable in the economy.
MARKET AREA AND SUPPLY AND DEMAND
"Every market is different" That is important to know before investing in CRE. When you invest, you are investing in a specific area that has its own unique supply and demand. But, most of the time, investors fail to conduct enough market research to determine if there is a potential risk.
When you understand how real estate market cycles work, it can help you to avoid buying when the market is high and being forced to sell when the market is low. And also, the various market cycles will help to determine what opportunities are present right now.
HAVE A CONTINGENCY AND CAPITAL RESERVE FUND
In every investment, there is always uncertainty. Even though you researched, prepared, and verified very well, there are always unknown factors that can positively or negatively affect your overall yield. The other way to close the said uncertainty is to account for the cost contingency.
What is cost contingency? These are the additional funds that the investors set aside as a part of their initial acquisition costs to help with unexpected expenses. Cost contingencies are very helpful if there will be negative cash flow while they are improving the property's overall performance.
BE PREPARED FOR SETBACKS AND EXTENDED TIMELINES
There are also uncertainties with the timeline. Most people set unrealistic timelines in which to build for their CRE investment. Renovation, changing management, new construction, increasing rents all take time. There will almost always be setbacks and challenges while in progress. Asset performances can fluctuate because of economic factors, that's why you need to have plans if delays occur.
I hope these things can help you to know how to start investing CRE and help you to recognize a profitable investment and protect against some of the potential setbacks and risks.