COMMERCIAL LOAN GUIDE
How to Create a Commercial Real Estate Investment Plan?
Successful investing means’ growing’ instead of merely ‘maintaining’ your savings so you can reap greater financial rewards later on. Planning is essential in this regard. Creating a written plan is particularly important to include commercial real estate (CRE) in your investment portfolio.
When you have a solid plan, it’s easier to ensure that all your CRE decisions and acquisitions can ultimately help you reach your targets.
The importance of planning
A commercial real estate investment plan begins with goal setting. First, think about what you want to achieve.
Do you want to earn a profit from the property for a big purchase? Do you want to grow your retirement fund? Do you want to create passive income from the property to buy more properties? Be clear about your target, no matter what it is.
Having a clear picture of the results you want to accomplish will allow you to choose the right strategies and avenues to reach them. It’s also easier to stay on track when you establish your goals right from the start.
Aside from this, a CRE investment plan also makes it easier to choose properties that fit your risk profile and offer acceptable returns. It involves assessing factors that may affect current and future returns so you can put your funds in a commercial property investment that can grow your wealth. These factors include current economic conditions and retail real estate trends.
And finally, commercial real estate investment planning lets you set a comfortable pace for growing your portfolio. You will see precisely how much money you can comfortably put towards new investments without compromising your living expenses and overall lifestyle.
You will feel more confident about the risks you’re taking, knowing that a mistake won’t ruin your entire financial house. With intelligent planning, you can achieve your future investment goals without sacrificing your current quality of life.
Also Read: Frequently Asked Questions for Commercial Real Estate Investment
What goes into a CRE investment plan?
There are a few things to think about when creating your commercial real estate investment plan.
1. Identify your niche and decide on a diversification strategy.
It’s important to know what’s available before you start planning. This means taking the time to understand the different types of commercial properties, including office, retail, multifamily, industrial, storage, commercial land, etc.
Would you like to own some of each type, or would you instead focus on just one style?
Both strategies have pros and cons. It can be challenging to become a true expert in all asset classes. But on the other hand, having properties in multiple categories can protect your CRE portfolio from downturns in particular types.
2. Decided on a few geographical areas
Many experts agree that picking just a handful of target markets for your CRE investments can improve your chances of success. This strategy allows you to diversify your risk while letting you learn (and eventually master) a few different markets.
Focusing on an area or two is especially important if you are new to commercial property investing. After all, just as it’s hard to become a real expert in multiple property classes, it’s also challenging to become a true expert in different markets.
You can go into acquisitions more confidently when you focus on just a handful of markets. Knowing the crime rate, quality of the school district, and other factors that influence commercial property supply and demand in your areas can help you run your business more efficiently.
3. Set your timelines
Commercial property investing is, for the most part, a long-term game. Most investors hold their properties for at least 10 years. Do you have a shorter holding period in mind? Write down your reasons for wanting to exit the investment in a shorter amount of time.
Let’s say that you want to sell the property in just five years. How and why did you come up with that holding period? What’s your plan if the property fails to meet your goals when it comes time to put it on the market? What will you do if you can’t sell it for some reason or another?
Thinking about your holding periods can guide your decisions, especially if you want to buy commercial real estate in up-and-coming neighborhoods.
4. Be realistic about your expected return on investment.
If you are new to commercial property investing, be sure to learn all, you can talk about metrics such as cap rates, internal rates of return, net operating income, and cash-on-cash return. In addition, we have several blogs on these topics that you may want to read.
Once you have a pretty good grasp of these metrics, it’s time to set reasonable targets based on your asset class and market. Again, these targets should be achievable and relatively accurate if you have researched the operating expenses, prices, and rents in your target asset class and geographical areas.
If a commercial property does not meet your targets, don’t hesitate to pass on it for now. It’s often better to preserve your capital for a better deal later on. Doing your due diligence and knowing your numbers can help you maximize your investment dollars.
5. Think about long-term growth.
Your commercial real estate investment plan should include a growth strategy. Think about how you’ll grow your commercial property portfolio. Do you want to use the cash flow from one property for another investment and acquire more properties as you go along? Do you intend to start with one building that you can trade up via 1031 exchanges? Having a clear idea of how you’ll expand your investment portfolio can guide your sale and purchase decisions.
6. Network, network, network.
Many new investors don’t realize the power of networking in the commercial real estate business. ‘Who’ you know in this business can dramatically affect your success rate. In reality, most CRE deals are made between parties who know each other and trust in each other’s ability to deliver.
Make sure that you’re taking time to talk to other investors with whom you can learn and share opportunities and resources. Aside from other commercial property investors, you also want to network with private lenders, good accountants, property attorneys, and commercial property brokers way before you need their services. This will allow you to get things done much quicker when an opportunity presents itself.
For example, suppose an investor friend approaches you with a proposal to establish a partnership to buy a warehouse building that needs to be closed in 60 days. In that case, you want to have access to a lawyer who can review the partnership agreement right away.
You also want a lender that can help you close immediately. Commercial property deals are often time-sensitive, so it’s crucial to have the right people in your team to help ensure that you don’t miss an opportunity.
7. Have a mini planned for each CRE property
Create a sub-business plan whenever you want to acquire a new property and ensure that it addresses all of the abovementioned points. You can set yourself up for success when you treat each deal as a business in itself.
Think about how this particular property complements your overall investment strategy. Does the property meet your targeted return on investment? What are the benefits and disadvantages of its location? Do you have the time and resources to take it on at this moment? Will you need partners to help you out?
A mini business plan for each property lets you set a roadmap that can ultimately guide all your decisions regarding this asset. You can also use your mini business plan to pitch the deal to lenders and partners, showing them the property’s value proposition as well as its role in your overall strategy.
Reasons to invest in commercial real estate.
Creating a commercial property investment plan can be overwhelming, especially for someone new to this business. However, it certainly helps to remind yourself why you are in the CRE investing niche in the first place. Make sure to review some of the benefits of investing in commercial properties if you need some inspiration. Here are some of them:
1. Good income potential –
Perhaps the number one reason why many investors include commercial properties in their portfolio is that they know that well-executed CRE projects are profitable.
Commercial property investments typically post annual returns of anywhere from 6% to 12% of the purchase price, depending on the current economy, geographical area, and external factors. This is much higher than what you can usually get for a single-family home, about 1% to 4%.
2. Professional tenant-owner dealings –
When you lease out your commercial property, you deal with small businesses—usually LLCs or corporations—instead of individual people. Small business owners are incentivized to take better care of the property because they want to make their businesses look good while protecting their livelihood. Because of this, you and your tenants will likely have more of a professional business-to-business relationship.
3. Aligned interests –
Small business tenants have a vested interest in keeping the property in good condition because if they don’t, their business suffers. Commercial property owners and tenants have the same interests, which ultimately help the owner improve and maintain the quality of the commercial property while protecting the value of the investment.
4. Less work –
Your tenants will likely go home at night after work hours, and as the property owner, you benefit from these limited operating hours. You will only work when they are working, rarely having to worry about getting a call in the middle of the night because one of your tenants lost a key or needs emergency repairs.
5. More scientific evaluations –
Residential real estate is often subject to emotional pricing. This is not a problem with commercial properties. However, CRE assets are generally easier to evaluate because there are tried and tested metrics in place.
6. Lease stability –
If you’re able to secure a triple net of these, you as the owner don’t have to worry about paying expenses on the property. That’s because, in a triple net lease, the tenant handles all property-related costs themselves, including taxes.
Chains and more prominent companies such as Starbucks, Walgreens, and CVS usually prefer to sign these leases because they need to maintain a specific look and feel to protect their brand—and they are willing to manage maintenance costs to do so precisely that.
As the owner, you don’t have to worry too much about maintenance expenses and focus instead on paying down your mortgage.
7. Flexible lease terms –
Commercial leases are governed by fewer commercial protection regulations, unlike residential spaces subject to dozens of state laws (including termination rules and security deposit limits).
Should you invest in commercial property for your use?
There are also many advantages to owning the commercial property your business operates, whether you own a factory, a bakery, or a medical practice.
How do you decide if it’s time to buy your premises? The answer depends on where you are in your business journey. If you are uncertain about your future space needs, leasing might be the best option for now.
But if your business is relatively stable and has a solid financial profile as well as a clear growth trajectory, it might make sense to buy your commercial real estate.
Owning your workspace also lets you take advantage of several tax benefits. The property itself can also help you build a solid foundation for your business.
These days, commercial properties are becoming more affordable, especially because some owners choose to sell in this uncertain economy. So do the math and see if it will cost you roughly the same to purchase a commercial property and build out a leased space.
Current financing rates are likewise favorable for business owners who are looking to buy their commercial premises. Rates continue to be low, so it should be easy to pay down your commercial real estate mortgage faster.
However, finding CRE financing continues to be a challenge unless you have a solid financial profile and a comprehensive business plan that makes you attractive to banks and other traditional lenders.
It’s a good idea to start talking to private commercial mortgage lenders if you want more options. They are more flexible in terms of designing commercial property loans for different goals and requirements.
And because these private lenders are experts in commercial real estate, they have a good understanding of your unique needs as a business owner looking to buy your workspace.
Another great thing about owning your business real estate is that it lets you enjoy equity appreciation, all timidly letting you better manage your company’s growth. What’s more, owning a CRE property gives you more options for retirement.
You can choose to sell the property outright and use the proceeds to beef up your retirement fund or lease it out to another business to create an ongoing income stream. And if you happen to purchase a commercial property designed for multiple tenants, you have more opportunities to make additional income through different rents.
Finally, owning your business premises lets you depreciate that property asset and write off all the mortgage interest you paid during the year. Several tax deductions may apply to you as a property owner, including Section 179.
The bottom line
There are undoubtedly many benefits to investing in commercial real estate, whether you are an investor-landlord, a flipper, or a business owner looking to purchase your building.
The key to enjoying all of the benefits of owning a commercial property is to choose the right property to begin with. Writing up a commercial real estate investment plan will help ensure that all your decisions are constructive to your current and future goals. Take time to do it right, and you will reap the rewards later.
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