Getting started in non-residential commercial real estate requires careful planning, research, and a solid understanding of the market. The diverse assets and varied valuation drivers can make it daunting to dive in, but more than anything, building on your strengths and experiences is key. Here are seven steps to help you embark on your journey into non-residential commercial real estate.
1. Education and Research
Learn about commercial real estate. There is an abundance of free content on podcasts, YouTube, and Facebook. Many people are putting out free content. Try to absorb as much as possible. When listening, try to take notes and write down some main takeaways to get the most out of this type of content.
For people getting started, a mastermind or education program can really accelerate the process. It also provides an instant network of people with similar interests. Being prepared to execute a deal before joining a mastermind may help you get the most out of the experience.
Start with what you know. There are many asset classes within non-residential commercial real estate. Build on your expertise. If you rent space as a contractor, for example, investing in flex industrial might make sense for you. If you are in the healthcare field, investing in medical office space might be a good place to start.
Study market trends. Research local and regional non-residential commercial real estate market trends, including vacancy rates, rental rates, supply and demand dynamics, and economic indicators.
2. Set Clear Goals
Define your investment strategy. Determine your investment goals, risk tolerance, desired level of involvement, and expected returns. Are you looking for cash flow, capital appreciation, or a combination of both? If you’ve invested in other assets, you should be aware of what you are looking for. Ultimately, if you are actively managing an investment, you need to make more than the returns you receive from your current passive investments.
3. Choose a Niche
Select a property type. Decide on the type of non-residential commercial property you want to invest in, such as office, retail, industrial, or multifamily. Each type has its own market dynamics and considerations. Narrow your criteria to start.
You will have more success if you can define the asset class, size, value, and grade of property you want to invest in. If you invest in everything, it can be difficult to find people to help you in the process. Again, you will have more credibility and success if you are building on experience.
4. Build Your Knowledge and Network
Network with professionals. Connect with real estate agents, brokers, property managers, investors, and other industry professionals. Try to be focused in your networking. Many meetups are focused on residential real estate and are attended by beginners. Try to find the people doing the type of deals you are interested in.
Stay in touch with people from networking events and conferences. There is no point in networking and not following up. Brokers in non-residential commercial real estate will be responsive if you present yourself as a knowledgeable investor.
Also, you will receive better guidance if you can clearly present your buying criterion. When starting out, having another investor or mentor critique your investments and strategy will help avoid mistakes.
5. Market Analysis
Identify target markets. Research and select specific geographic areas that align with your investment strategy. Analyze factors such as job growth, population trends, and infrastructure development. Build on any market knowledge you have or within your network to give you an edge in making an assessment.
Generally, your market — or, at least, your sub-market — must be growing in population or development terms to make sense for investing. Go to development meetings in your area to understand what is being proposed. Especially if you live in a smaller town/tertiary market, you can access and get to know the important players quickly.
6. Property Search and Due Diligence
Search for properties. Utilize online listings, real estate agents, and networking to identify potential properties that match your criteria. Set up your search criteria and review every property that matches it.
Conduct due diligence. Thoroughly research properties of interest. Evaluate financials, leases, property conditions, and local zoning regulations. Auction site properties are a good starting point — even if you aren't interested, you can find complete due diligence packages for some auction properties. You'll ultimately want to create a team including inspectors, contractors/tradesmen, and attorneys for comprehensive due diligence.
7. Understand Financing Options
Explore financing sources. Investigate various financing options, including traditional bank loans, commercial mortgages, insurance companies, private lenders, and partnerships.
Assess your finances. There is not a real pre-approval in the non-residential commercial space, as financing is property-dependent. You should be prepared with an understanding of how much capital you can bring to the table and what the current terms are for financing. Then, find a few banks that lend in your asset class and geographic area in advance of finding a deal. If raising capital, make sure you are reaching out to people well before you actually find a deal so you can build an investor list.
If you can spend a couple of months on these basics, then you should be ready to invest. Being regimented in assessing each of these areas will give you the confidence and expertise to get a deal done.
About the Author:
Vijay Prabhakaran is a commercial real estate investor who has invested in small multifamily properties in Chicago over the past decade, which allowed him to replace his take-home pay and shift to non-residential commercial properties. As a Best Ever blog contributor, Vijay aims to share his experience achieving financial independence and his decision to focus on multi-tenant retail and industrial spaces in the Midwest.
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.