What qualifies as commercial real estate? What constitutes a good investment? How is a DSCR loan obtained? And what is a DSCR loan, anyway?
While all of this may seem intimidating at the start, don’t fear. We’ll walk you through five ways to set yourself up for success in the world of commercial real estate.
What is Commercial Real Estate (CRE)?
In a nutshell, commercial real estate is any kind of property from which a profit can be earned. This income can be generated through rental income and/or capital gain. One type of commercial real estate is multi-family homes. In this instance, you’d be generating income through rent paid to you by your tenants. Similarly, office buildings, retail storefronts, warehouses, and industrial properties can also generate income in the form of rent. Hotels are a little different, in that the income source here is the fees paid by guests.
These examples are just jumping off points. Think outside the box! Anything that generates income or has the potential to provide capital gains qualifies as commercial real estate.
1. Know Your Market
Before making an investment, do your research. Investigate the commercial properties in your area. Which tends to thrive?
What’s the occupancy percentage of multi-family dwellings in your area? What’s the market rate rent? If you’re interested in retail space, know the going rate per square foot. Notice what types of businesses do well before choosing a tenant. What level and price range are the hotels in the area? Is the market oversaturated, or is there a demand for more?
Investing in office space can be particularly tricky these days. Many companies have shifted to remote or hybrid work models, making office buildings less profitable in some areas. Is there a lot of open office space in your desired area? Or are companies looking to get their workforce back into the office?
Once you’ve done your due diligence, it’s time to meet other people who are active in your local real estate microenvironment.
2. Build Your Network
You’ve probably heard the saying “it takes a village to raise a child.” This is also true when it comes to investing in commercial real estate. There are lots of different aspects to building a strong network, and they’re all important.
There’s immense value in connecting with other commercial landlords in the area. Not only can you learn from their successes, failures, and strategies, but if you’re lucky, they may also be willing to show you the ropes.
Additionally, look for potential investment partners. Commercial properties are expensive. Having business partners can help when it comes to having enough capital to take the initial leap.
It’s also important to build roots in the community. Get your name out there. Cultivate relationships with local residents, business owners, and elected officials. This puts a face to your name and makes you more relatable. Investors and tenants alike are more willing to trust someone they’ve met in person.
3. Solidify Your Team
Through networking, you should begin to build your team. Who will comprise your investment group? When going through this process, it’s important to think about your own strengths and weaknesses.
Seek out individuals who excel where you don’t. If you’re great at evaluating potential properties, but don’t know much about financing, partner with a finance expert. If you aren’t familiar with the area, partner with someone who is. By the time your team is built, it should include at least one expert in every area of the commercial investment process.
4. Select Your Properties
Now comes the fun part. You’ve done your research; you’ve assembled your team. It’s time to decide what you’re going to invest in. Get creative! Imagine all the possibilities for that retail storefront. Consider what it would be like to restore that fixer-upper and rent it out. Wander through warehouse space and picture it filled with your tenant’s equipment. Visualize the chic lobby of your hotel.
But wait! Before you pull the trigger, it’s important to calculate what you can realistically afford. Commercial real estate investing often requires a large chunk of change. Most likely, you’ll have to seek financing in order to make your vision a reality.
5. Secure Your Financing
Obtaining a loan for a commercial property is a very different process than getting a home or car loan. One way of financing commercial buildings is through a DSCR – or debt-service coverage ratio – loan.
Basically, DSCR is a calculation of how much income your property can generate compared to your loan’s principal and interest payments. Lenders prefer to issue loans to customers with higher DSCRs, because this means they’re less likely to default.
Your own personal income and net worth aren’t considered for commercial loans. They’re solely based on the property and its income generating potential.
Once you understand how the loan process works, shop around. Speak to different lenders to find the best rates. Do your research, compare loans, and choose the one that makes the most sense for your team.
Commercial real estate investment can provide a steady source of income for smart investors. If you do your research, build your network, assemble a great team, choose the right properties, and select a sensible loan, you’ll set yourself up for lasting success. Take your time, build a smart portfolio, and step confidently into the world of commercial real estate!