Commercial real estate investing shares many similarities with traditional residential investing, but there are some key differences to keep in mind when deciding to get into a commercial opportunity. One of the biggest differences, of course, is that almost all commercial real estate investment opportunities have values that are considerably larger than residential properties. There is nothing either inherently good or bad about that, except that it is important to keep in mind that wise investment of any kind requires that you evaluate a full portfolio. How many times have people heard the old adage "Do not put all your eggs in one basket?". It is very easy to get in over your head when investing in property of any kind, but the larger the property, the easier it is to over expose yourself on it. Our first tip, therefore, is to:
1. Make sure you can afford the investment
A common mistake for investors to make in deciding whether they can afford an investment is simply determining whether or not they have enough money for it. If something costs X amount, and you have X amount, that does not mean you can afford it. Every opportunity must be considered in terms of a portfolio as a whole.
2. Be very careful when leveraging.
In keeping with being able to afford it, it is common for investors to take loans in order to minimize their exposure. It sounds like common-sense, but failing to prepare a realistic income forecast for a potential investment may result in an inability to keep up with loan payments.
3. Location, Location, Location.
By definition, real estate in general is all about location. In commercial real estate, this is even more important. In order to get the most out of a commercial rental property, for example, you must do your research to determine which kind of business would benefit most from your property, and work at making the property extra attractive to that target audience.
4. Demanding Tenants.
No landlord wants to be known as a bad apple, but the fact is that some owners can get away with certain practices that are less than ideal. Very few are due to ethical lapses, but whether actions are due to sneaky business practices or to overlooking details, actions that a landlord might get away with in a residential setting are absolutely unacceptable to commercial tenants who have enormous financial stakes in their businesses.
5. Be prepared for long periods without a tenant.
From a tenant's perspective, changing locations is immensely more difficult in commercial situations than in residential ones. While a home renter can pack up and move to a more attractive location with relative ease, commercial moves involve mountain's of paperwork and logistical management that must be calculated into the cost of moving for a tenant to make it worth it for them. Compared to residential renters who make emotional, commercial renters will (or should) conduct in-depth feasibility studies about potential moves. Investors would be wise to do some studies of their own to be able to make their properties more attractive to tenants.
In general, the most important aspects of commercial real estate investment are fundamentally no different from other types of investing, and almost all involve a great deal of due diligence at the outset. Unlike with stocks or bonds, you can not leave the research to others and simply ride popularity waves (a form of investing which comes highly unrecommended, by the way). You have to consider each opportunity from scratch.
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