5 Tips All First-Time Real Estate Investors Should Know

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Investing in commercial real estate is an exciting prospect and one that is appealing to many, given its consistent returns, passive income, and potential growth. But while commercial real estate has great potential to be profitable, this doesn’t necessarily mean all investments will be a grand success.

Before going ahead and investing in commercial real estate, it’s important to be mindful of knowing when, where, and how to invest to ensure your investment is a success. If you’re a first-time commercial real estate investor, here are 5 great tips to take note of before investing.

Asset Class
February 1, 2022
Klein Commercial
Acquisition & Disposition, Development Advisory Services, Capital Markets, Landlord Representation, Project Marketing, Tenant Representation, Sale-Leaseback Services, Real Estate Management, Property Appraisal & Tax Services, Project Management, Consulting, Asset Advisory Services, Debt Advisory, Research Services, Workplace Advisory, Institutional/Not for Profit Advisory

#1 Do your Due Diligence

For many first-time commercial real estate investors, the opportunity to buy their first commercial property can be an exciting one. However, this excitement can in some instances result in the buyer rushing through a deal or even missing a key step in their due diligence.

One of the most important steps to take when investing in commercial real estate is to undertake the right due diligence. As a buyer, you need to be knowledgeable about the property, but also about the market in general. As part of your due diligence, you will want to make sure you carefully review the financial statements and tax returns from the previous owner and conduct property inspections. Having a clear understanding of the work that is required through careful inspection and analysis before purchasing will save making an expensive mistake in the future.

In order to make sure no step is missed in your due diligence, it’s advisable to follow a due diligence checklist. A typical due diligence checklist is a guide to ensure that each step of your due diligence is complete effectively in the areas of Financial, Physical, and Legal.


Financial Due Diligence:


Through the Financial Due Diligence, you will verify all financial documentation that has been provided, including financial statements, financial expense data, and taxes.

An example of a Financial Due Diligence checklist is shown here:


Physical Due Diligence:


Physical Due Diligence includes inspecting the physical property and the integrity of the exterior and interior structure. This will involve inspecting the plumbing, electricity, and heating.

An example of a Physical Due Diligence checklist is shown here:


Legal Due Diligence:


Legal Due Diligence involves examining legal documents, 3rd party reports, code compliance, and warranties.

An example of a Legal Due Diligence checklist is shown here:

#2 Know the Market Area & Demand

The commercial real estate market varies vastly, so it’s important to thoroughly research the location, laws, and demand of where you’re looking to invest. As you search the market It may appear that certain properties are doing well on a macro level but then later find there is an oversupply in the town or city.

As a first-time investor, you need to have a full understanding of the market you are considering and the type of product, whether this is industrial, commercial, or retail. Understanding the value of the cash flow potential in the market, and the value of the bricks and mortar in the market area is vital before any investment is considered.

When looking at the local market, it’s important to find a good location for your business. If you are aware of what your business needs in terms of location, then you will be one step ahead. Additional research into the traffic generators of the town/city, and competition nearby, will help to determine if the location fits your business and investment. To understand the area more, you can speak to a professional by choosing a Commercial Real Estate Broker for their tips and advice.

The number one mistake many first-time buyers make is that they fail to conduct enough research to determine the market and potential risk of market saturation. The perfect place to start is by researching the supply in your local market, when doing so taking into account the current rentable square footage and potential added square footage that can be available through potential construction.

#3 Consider the Risks & Rewards

To ensure you have clear visibility of the risks and potential rewards in the investment, make sure you have a clear understanding of numbers and real estate lingo. Having a full understanding of the formulas for Cap Rates, NOI and other applicable financial terms will help make sure you have a clear understanding.

As exciting as it may be for first-time investors, many get too emotional in investing, which causes them to overlook certain miscalculations. In many cases, this results in the purchase of the commercial property being over their original budget. Therefore It’s important to always set out the budget first and remember to include any hidden costs and fees.

By understanding the risks associated with and potential rewards, investors can then begin to understand how long it will take to realize a return on investment. This largely will then depend on market conditions and if the investor invested intelligently.

When you are fully equipped with what to look for and how to read the information, you can then determine whether it’s an investment worth pursuing. As an investor, you can then start to answer questions such as what kind of return will I expect to get on the investment? Risks and rewards can also come in other forms too such as taxes, tenants, cash flow, and market predictions.

#4 Understanding the Market Cycles

As a first-time commercial real estate investor, you will need to know and understand the health of the current economy. Having a deeper understanding of the GDP, and unemployment rate in the area will give you the upper hand when trying to decide whether the market cycle is right for you at the moment.

The commercial real estate market is directly correlated to the local economy, so being mindful of the economy is a must before investing. This can then help to avoid you buying in the market when it’s too high or being forced to sell when the market is too low. Having an understanding of key indicators of the market cycle will allow for you to make an informed investment decision.

The cycle pattern that links the commercial real estate market to the local economy is known as the “real estate cycle,which has four phases. These four phases are known as recovery, expansion, hyper supply, and then recession. By having a clear understanding of the real estate cycle, this can help to predict up and coming trends, which in turn helps to make an informed decision about your investment.

#5 Have a Contingency Plan

Of course, we don’t want to think about our investment going south, but it’s necessary for the event that it actually does. Having an exit strategy is crucial to keeping yourself as protected as possible. The ultimate goal is to profit from your investment, and if the best way to do that is to get out of your initial investment, then having some backup plans in place should the situation arise will spare you a lot of headache and money.

With time, commercial real estate investing will become like second nature to you. Just remember that everyone starts somewhere, and these 5 tips will help set you up for success in your real estate investment journey.

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