5 Commercial Real Estate Myths
For both veteran and beginning investors, commercial real estate represents an exciting, often profitable, investment opportunity. In addition to its higher income potential, commercial real estate investing can be a great addition to an investor's portfolio and ongoing wealth-building strategy.
It is important to note that as much opportunity surrounds investing in commercial real estate, so do misnomers about the perceived difficulties and challenges of acquiring commercial property. This fascinating (often misunderstood) form of investing is not without its myths, but here are five myths debunked about it.
The 5 most common commercial real estate myths
Myth #1 – Too much money
Commercial investing requires large bankrolls to finance, which may be the biggest myth of them all. Commercial properties require a large capital investment, but there are several money lenders and banks willing to finance your venture. Also, private money lenders are often more interested in commercial investments than residential ones. Profit potential is higher, recurring income is more stable, etc. The key, as with any form of investing, and a tenet that should be at the top of any commercial real estate investing 101, is the importance of a professional presentation. You simply must present (and convince) other people financing your project that you have the skills, experience, and drive to see the deal to successful completion. Do that, and show enough profit potential, and financing will be less of an issue than you think (no matter how complex the commercial project becomes).
Myth #2 – Too much time
There is a tendency with investors approaching commercial real estate investing for the first time to believe that because a property increases in size or complexity that it will exponentially increase the time required for management. It’s important to remember that, as an investor, your primary job is to find and complete deals — and put in place systems to ensure a property is running smoothly. Your job is not to watch over the property all day or fix every broken water pipe or burnt-out neon sign that crops up.
All of the maintenance and renovation work required can be, and should be, outsourced to a property manager or contractor. And finding tenants or buyers can easily be off-loaded to a listing agent who specializes in commercial properties. The same principles of entrepreneurship — and valuing what your time is worth and what you should spend time on — that apply to residential investing also apply to commercial investing (just to a greater degree). Something that can be super-charged by reading some of the better commercial real estate investing books out there.
Myth #3 – Too much risk
Every business venture involves risk, and commercial real estate investment is no exception. The question is one of degree, and whether that risk outweighs the potential reward. Let’s say a residential property costs you $100,000, while a commercial property costs you $500,000. Does the commercial property represent a 500% higher risk? If you know what you’re doing, probably not. There’s no question that some commercial properties are riskier than others to invest in. The risk level of a commercial property is determined by several important factors. Properties on a triple net lease, where the tenant is responsible for ongoing expenses, are less risky. Returns will be steady, however, the profit potential isn’t as high. Office properties, on the other hand, have higher risk and are more volatile. Remember, the more volatile a property is, the higher the risk and ultimately, the profit. The key is to find a good balance between low risk and high profit that works for you.
Myth #4 – Good deals are hard to find
First of all, the term “good” is subjective and individual-based. A deal that is good to you may be a waste of capital to other people. However, there are always good investments in real estate, at all times. It all depends on how you intend to proceed. Some people prefer to buy properties when the market is down because in the long run the property should appreciate. While triple net lease properties are usually always available, no matter what the market, and provide a fairly-stable risk profile. The key is to become a diligent student of investing and the commercial market in your area of focus. By doing your homework, and knowing exactly what kind of commercial listing you’re aiming for, you’ll be ready to strike when the time comes.
Myth #5 – If a property is for sale, something is wrong with it
People sell properties for varying reasons. Some people sell property because they have an exit strategy in mind. Some people sell off their property because they want the cash flow to buy another bigger and more profitable property. It can be self-sabotaging, and more than a little stressful, to over-think the market and look for flaws in a property that aren’t there. In fact, all of the same due diligence actions — inspection, title search, etc. — should to be done with a commercial real estate holding as well. Surround yourself with a team who knows the commercial market, and will do proper research on a property, and you’ll have the information you need to adequately asses a commercial property’s potential.
The Myth-Conceptions Of Commercial Real Estate
There are, no doubt, genuine obstacles to investing in commercial real estate. Most commercial properties are never advertised. You can’t post on Craigslist or put up bandit signs to find your next commercial property. And the financial stakes are higher — and more complicated — than with a residential property.
But many of the same challenges you’ll confront when investing in commercial real estate are the same exact ones you’ll face investing in a single family home. It’s all a matter of scale, and knowing that preparation and diligence can make even the largest project manageable and realistic. (Which might be the biggest myth-buster of all.)