Commercial real estate comes in many different forms. You might purchase 200 acres and lease multiple lots to retail stores. In an extreme example, you might buy an entire exit off an interstate and lease the land to businesses that wish to locate there. You might construct buildings and lease them out as offices, medical centers, travel agencies, restaurants, etc. Most investors who first wade into commercial real estate think of buildings. You could buy a vacant commercial building, renovate it, and resell the property for a profit. You could lease the building without selling the property. Although apartment buildings are sometimes considered residential properties, they’re also commercial real estate. Apartment buildings are easy to find and usually generate positive cash flow.
To simplify the choices in commercial real estate, we’ve categorized the possibilities into three general areas – Buildings, Leasing, and Development. The three areas often overlap, such as purchasing a commercial building that contains offices or units you lease out. Most land development today involves leasing the land to commercial tenants. To help sharpen your focus when delving into commercial real estate, ask yourself which area interests you more – buildings, leasing, or developing. You probably don’t have the funds to jump right into land development, but at least you’ll have an idea what it entails.
Before you make any concrete decisions in commercial real estate, you should first secure your financing. You’ve probably heard the stories about real estate investors who had big dreams but couldn’t obtain the financing. Talk with your bank. Talk with an investor who specializes in commercial real estate lending. You’d be wasting your time dreaming of developing a 40-acre strip mall if you can’t obtain the financing for it. There are a lot of lenders who specialize in commercial real estate development. It’s up to you to find one and establish a working relationship before attempting your first venture.
If you live in a relatively small city or town, the commercial real estate opportunities may be limited. You might have no choice other than that old gas station that closed back in the 70s or the run-down motel that went out of business 30 years ago. If your choices are limited, you’ll have to venture into other cities or towns. We don’t need to remind you of the rule by which all commercial businesses live or die: location, location, location. If your research determines that a location isn’t viable for any type of commercial business, then don’t buy it. Even if the bank owns the property and is willing to sell it for $1, don’t buy it!!!
Unless you’re a seasoned real estate investor with virtually unlimited funds, don’t go after the high-dollar projects right out of the gate. For your first venture, you might want to try flipping a commercial property. Fix it up and resell it for a decent profit. Or, fix it up and lease it out. You need to get your feet wet and learn everything you can, every step of the way. First-time investors are often overwhelmed by the realtors, lenders, contractors, subcontractors, building inspectors, and everyone else that turns a simple project into an unexpected nightmare. Getting your feet wet and your hands dirty is the best way to learn all you can. With this valuable knowledge under your belt, you’ll be better prepared to take on your next commercial real estate project.
You should determine your ultimate goal before starting your commercial real estate journey. What is your goal? Are you hoping to add $250,000 to your bank account by the end of the year? Or are you looking more toward the future and your retirement? If you want to turn a quick profit, you’ll be limited to flipping commercial properties. If your goal is to build an adequate monthly income for retirement, you’ll probably want to consider leasing your properties. If you had to make a decision today, would you choose a $250,000 immediate profit or $5,000 per month income for the rest of the your life? Once you’ve determined your goal, don’t let anyone chance your mind.