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Your Quick Start Guide to Commercial Real Estate Investing

Oct 4, 2021 12:29:15 PM


pexels-philipp-birmes-830891Commercial real estate (CRE) may be a good alternative for some investors looking to diversify their portfolios. The recession softened commercial property prices in some markets, and as the pandemic comes to an end, commercial spaces will likely bounce back.

Before you jump in, here are some basics you'll need to know.

First things first: expect commercial properties to be more expensive than residential properties.

With that in mind, you'll need to know what kind of financing is at your disposal. Here are the most common loan options:

  • Conventional Financing - From a bank, credit union, or other traditional financial institution. Leverage ranges from 75 to 80% of the property value. A common step-down prepay schedule is utilized if the property is sold or refinanced before the end of the loan term.
  • Bridge or Hard Money Loans - From private individuals or groups. These are often used if the property needs renovations, must be closed on quickly, or is otherwise an "unstable" investment. Interest rates are much higher than traditional loans (8-12%) but leverage can range from 75 to 90% and funds are secured more quickly.
  • CMBS or Conduit Loans - "Commercial Mortgage-Backed Securities." These loans are secured by the commercial property and have fixed rates and flexible underwriting. Rather than paying back the loan to the original lender, they are packaged and sold on the secondary mortgage market to bond investors. The borrower then answers to a CMBS "mater servicer."

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Weigh Out the Pros and Cons for Yourself 

The pros of investing in commercial real estate are similar to the pros of residential real estate but not identical.

Low Turnover
Commercial leases tend to be long and many businesses are reluctant to move. Low turnover means that you maximize your cash flow.

Diversity
There’s a niche for everyone in commercial real estate. You can truly specialize in a certain type of commercial property based on your ability and risk tolerance.

Reduced Management Burden
Although managing CRE is a tough job, you’ll find that the management burden, in some respects, is less. You’re not going to have business owners calling you at all hours of the night about overflowing toilets. Your residents will likely cause fewer problems, too, as they should want to maintain a level of professionalism.

Less Market Competition
The buyer pool for commercial properties is limited to investors. They may vary in size and reach, but you don’t have to compete with the Average Joe as you would in residential real estate.

But, lest we forget, there are certainly some cons to consider as well...

Limited Exit Strategies
Although you have less competition as a CRE buyer, you have fewer options as a seller. You have to find another investor or investment company to take the property off of your hands when you want to unload it.

Higher Price Tags
CRE presents a steep barrier to entry in its price tag alone. Commercial property values are assessed partly by square footage. Because you’re looking at often massive properties, this alone can push property price tags upwards of $1,000,000.

Lending Challenges
Lending standards are already tough for the average homebuyer. Commercial real estate deals with higher price tags, so qualifying for a loan is that much more difficult.

Recession Challenges
COVID revealed unique challenges for the commercial world. Although residential real estate thrived, commercial real estate struggled due to the recession. Many people lost their businesses or reduced their office spaces to save money — meaning plenty of newfound commercial vacancies.

What do you think, do pros or cons win out? Tag us with your CRE stories! 

 

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