Advice for the residential owner/investor
When the housing market collapsed, investors of all sizes swooped in to buy up residential properties to grow wealth and expand portfolios. What is often overlooked, though, is another real estate investment opportunity that often stays comparatively stable during swings in the economy: commercial real estate (CRE).
Diversifying into the CRE market is vastly different than investing in residential, and investors new to CRE should dip their toes in slowly and cautiously.
Questions the new CRE investor should ask
Most residential investors are familiar with the ins and outs of single-family homes, duplexes and triplexes, and even small apartment buildings. CRE investments operate on a whole new set of metrics and complexities – and a new investor needs to answer a few key questions before jumping in:
- What are their return requirements going to be?
- What level of complexity are they willing to live with for that investment?
- Are they professional investors, or will the CRE opportunity be a side investment vehicle?
- What is the bandwidth in terms of time and resources they have to handle the complexities of CRE?
The positives of CRE investment
There are a host of unique benefits from commercial opportunities. Topping nearly every list is the reason why so many turn to the CRE market: higher yields. Generally speaking, commercial tenants assume many more costs (such as insurance and maintenance) than landlords do for residential properties.
Additional positives include:
- The relationship with commercial tenants, most of whom sign long-term leases, tends to be on more professional footing. Calls and issues usually arise during the business hours, rather than at all hours of the night, as with residential tenants.
- In most cases, commercial properties tend to increase in value over time, especially as surrounding development improves and/or the commercial tenant attracts more customers. Profits not only increase in the short-term, but also increase for a future resale.
- The building and the quality and location of the commercial land all play a role in providing greater security, shielding the investment from many economic swings.
The complexities of CRE investment
Despite the positives, there are complexities woven throughout CRE investment – and failing to deal with each one usually comes down to a single mistake: the investor not doing his or her homework.
Many new-to-CRE investors falsely believe that commercial properties won’t go into foreclosure, and failure to do proper research can lead many investors down that path. Consider the following before taking the leap:
- What are local market conditions? Many new investors can easily be swept up by a great property in a bad area and, at the same time, overlook a lesser property in a good area. Do a thorough investigation of demographics in the region: population, income, employment, and other economic factors.
- What’s happening under the skin of the building? Many commercial properties have more complex structural components and systems than residential properties. The investor will have to rely on knowledgeable professionals to peel back the layers and truly understand what’s happening or not happening – and the associated costs – within the building.
- Don’t casually assume income and expenses. Risks increase with projections. Numbers should be verified and confirmed.
- What is the break-even ratio of the investment? Operating Expenses + Debt Service divided by Gross Potential Income = Break-Even. If the ratio tops 80%, the investor is on thin ice, and runs the risk of borrowing too much money to get into the game.
The number one solution in CRE investment
Of course, the best way to face many of these issues is to talk to someone who is well-versed in CRE and the area you’ve chosen. The professionals at Morris Southeast Group have decades of experience in helping commercial investors in South Florida and beyond, and we help match a new investor with the best opportunities.
For a free consultation on CRE or to learn more about our property management services, call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
Tags: Get Into CRE
