Investing in commercial real estate can be an appealing endeavor for a number of reasons. Whether investing in retail buildings, industrial property, or mixed-use developments, commercial real estate often offers more financial reward than its residential counterpart. It also provides investors an exciting opportunity to expand their portfolio and grow their business interests. If done correctly, investors can develop a truly successful master plan, one which will allow them to be profitable in an incredibly competitive landscape.
However, with the benefits come a slew of risks. It’s important to understand the pros and cons of commercial real estate before diving into your first investment opportunity. Property deals can be lengthy and complex—and securing financing for your project is a whole beast on its own. Here are six of the top tips you should know before investing in commercial real estate.
1. Understand the market
As an investor, you should have in-depth knowledge of the market you’re investing in. Maximizing market knowledge is key in ensuring a profitable return. Do your research, and understand the current trends, shifts, and growths in the market. Read up on commercial real estate investment forecasts and outlooks for the type of property in which you’re planning to invest, whether that be retail, industrial, or multifamily. Following trends in the market will help you make the most knowledgeable investment, potentially earning you the largest return.
2. Evaluate risk by property type
With each type of property comes its own range of risks. Risk assessment and management is key for a healthy investment. For example, while two residential developments sitting next to each other might fair similarly well, two office spaces may fluctuate independently.
While risk is inherent in real estate, it’s important to evaluate the risks specific to your property, to develop the most strategic and effective plan for your investment.
3. Research area demographics
Along with understanding market trends and risks pertaining to their property, investors should be knowledgeable about the demographics for the area in which they are investing. Think about it: significant changes in where we live and work will generate different needs in retail spaces, office complexes, or multifamily developments. Those who understand the broad demographic trends impacting commercial real estate can have a competitive edge in their investments.
4. Gather the necessary materials
After you’ve done your due diligence, it’s important to gather all of the necessary documentation to move forward with your project. Even if you as the investor have a clear view of your vision, your lenders need to know that they are financing something worthwhile. That’s why, in commercial real estate, it all comes down to hard facts.
All lenders, traditional or private, will require specific documentation before closing a loan to move forward with your loan. Your lender will typically require, among other things, three core documents: a title report, an environmental report, and an appraisal.
Title
Title search is a key component of any kind of commercial real estate transaction. This search provides essential information on the history of the property, who currently owns it, who previously owned it, and any liens filed against the property. Any lender will require proof of a clean title before moving forward with financing your project.
Environmental report
Just as your lender will want to see a clean title, they’ll likely request an environmental report before granting a commercial loan. Environmental site assessments investigate the commercial property to discover dangerous contaminants, and are key when considering the environmental liability for a possible property purchase.
Appraisal
Finally, your lender will require an appraisal, or a value assessment for any type of commercial property. Your appraisal might cover a number of important factors about your property, including a comparative analysis of nearby properties, an estimate of the value of the property, and a list of any possible risks you might encounter.
It’s important to have all accurate documentation ready for your lender to review, to ensure the most efficient funding process for your project.
5. Explore your financing options
When it comes to commercial real estate, finding funding through traditional sources will be tough. Due to the risk factors, banks are often reluctant to make loans for real estate purchases and developments. Many investors are turning to alternative lending to finance their projects, because private lenders take risks that banks are hesitant to take. For example, Silver Arch Capital Partners, a nationwide private lender, are leaders in creating specialty funding, offering an array of loan programs to help turn commercial real estate investments into profitable opportunities.
Find a lender who has a rich history and a notable track record of closing bridge loans to finance projects similar to yours. Silver Arch Capital Partners, for example, are experienced dealing with borrowers that other lenders have turned away, surpassing over $2 billion in loans over their partner’s history. Finding the right lender is a vital first step in moving your initial vision into the developmental stage. Do your research, consider your options, and set your standards high—Only partner with experts in the commercial real estate market, whose prior loan closings have historically proven successful.
6. Stay active in your investment
At the end of the day, investing in commercial real estate requires you to play an active role. Your homework doesn’t end when you secure funding. Throughout the span of your project, stay up-to-date with market trends, shifts in area demographics, and all other factors that might influence the potential of your property.
Partnering with experts in the financing of your project is one of the safeguards you can set from the get-go. Find a private lender, like Silver Arch Capital Partners, who you can be confident will help achieve your vision. Do your research, stay informed, and follow the necessary steps in order to maximize the success for your commercial real estate investment.
