7 Steps to Help You Break Into the Commercial Real Estate Sector
Savvy investors know the best protection against extreme financial loss is a diverse investment portfolio. Yet, many overlook the commercial real estate (CRE) sector. Perhaps it is because they fear the large, upfront investment, big risk, and long-term return on their investment. More likely, however, an investor may hesitate or even avoid the CRE market because they do not fully understand the benefits or the necessary steps for breaking in to this type of market.
Why Commercial Real Estate?
The first issue to address is the “why” behind commercial real estate. Certainly, there are other types of investments with lower risks. Yet, it is the high risk and large investment amount that make CRE properties so appealing. They offer a steady and stable return. Real estate is also considered a tangible asset, which investors can use as collateral on other investments.
Additionally, there are unique tax breaks for CRE investors, such as the option to depreciate the asset over time, which can decrease your yearly taxable income. CRE properties can also provide you with an inflation hedge - something you will not get from stocks, bonds, or other similar investment types. In short, commercial real estate investment offers opportunities that you will not find in other types of investments.
Breaking Into the CRE Market
Like all investment types, there are unique challenges, obstacles, and nuances in the CRE market. Meaning, to truly break in and reap the rewards of CRE investment, one must be mindful of their steps. The following seven cover the basics:
- Ask Yourself a Lot of Questions: Commercial real estate is a broad term that covers a wide range of property types. Each presents its own challenges and potential benefits for the investor. Your goals, risk tolerance, willingness to partner with another investor, and financing options are all considerations used to determine which property types may be most suitable for your situation. Location can also pose some unique benefits or challenges, depending on the scenario.
- Learn the Vocabulary: The CRE sector is full of acronyms and unique vocabulary. Before breaking into the market, take the time to learn some of the most commonly used and important terms, such as LTV (loan-to-value), DSC (Debt Service Coverage Ratio), Vacancy Rate, Ad Valorem, Cap Rate, Cash on Cash, and Usable versus Rentable Square Feet.
- Consider Multiple Properties and Do Your Homework: A savvy investor knows they should compare all the variables before making an investment. The same is true for CRE investment. Look at multiple properties—not just one—and compare them. Consider matters like price and upfront investment, location, possible and allowed uses, and the potential return on investment (ROI) to determine which best suits your needs and current circumstances.
- Hire a Team of Seasoned Professionals: No CRE investor achieves success without a strong and seasoned team of professionals. At minimum, you are encouraged to hire a realtor who is well-versed in the CRE sector, an experienced accountant, a mortgage broker, and a seasoned CRE attorney. You may also need a notary, appraiser, engineer, tax specialist, or environmental specialist, depending on the project.
- Get Your Financing in Order: Most CRE investors need financial backing for their projects. Rather than delay the signing process, figure out your financing options early on. Banks, credit unions, and mortgage companies are the most commonly used, but owners/sellers are sometimes willing to offer some financial backing.
- Have Your Lawyer Draft a LOI: Once you have made a decision about the property, done your initial homework, and have financial backing, it is time to move forward with an offer. Rather than do so independently, approach your lawyer and ask them to draft a letter of intent, or LOI. They can help ensure it is legally binding and carefully worded to protect you in the event of an issue, later on down the line.
- Escrow and Due Diligence: This is where things start to get real. Money changes hands via escrow. The property is about to become yours, but your work is not yet done. There are still some critical steps in the process, specifically the due diligence to ensure all details related to the property (boundary locations, identification of easements, etc.) are disclosed and accurate.
Contact Our Skilled Naperville Commercial Real Estate Lawyers
Lindell & Tessitore, P.C. is one of the most trusted CRE firms in the state. Backed by decades of experience, our Oak Brook commercial real estate attorneys are committed to helping new investors successfully break into the market. Schedule your personalized, no-obligation consultation by calling 630-778-3818 today.