If you’re interested in capitalizing on the value of your existing wealth or if you’re looking for a sustainable strategy that can help you accumulate wealth in the long term, commercial real estate investing is one of your best bets. However, it’s not a get-rich-quick scheme, nor is it a guarantee of wealth accumulation.
With proper strategizing and attention to detail, even inexperienced commercial real estate investors can find a path to success. But at the same time, a few wrong strategic moves can quickly devastate your plans and end up bankrupting you.
So, what are the most important principles for success in commercial real estate investing, and how can you follow them consistently?
Commercial vs. Residential Real Estate Investing
Residential and commercial real estate investing share many similarities, but . Commercial real estate assets tend to be much more expensive, serving as a larger barrier to entry for most real estate investors; the flip side of this is that they also tend to generate more revenue and increase in value proportionally.
Commercial real estate investing also has more stable, longer-term tenants and different styles of leases that are available; for example, triple net leases require your tenants to pay for expenses like common area maintenance, property taxes, and insurance.
At the high level, commercial real estate investing is more complicated, more expensive, and in some cases riskier, but it also has a much higher potential rate of return and more strategic flexibility.
The Most Important Principles for Success in Commercial Real Estate Investing
So, what are the most important principles for success in commercial real estate investing?
- Responsible use of financial leverage. is an advantageous strategy that allows you to invest with borrowed money; it’s a way of investing with more assets than you currently have while minimizing risk and maximizing possible returns. However, it can be a risky strategy, as taking on too much debt could end up crashing your entire investing plan. If you want to be successful in commercial real estate investing, you need to take advantage of financial leverage without overleveraging yourself. This can sometimes be a difficult balance to strike.
- Due diligence. Every property you acquire requires your due diligence. Commercial real estate property transactions tend to be nominally high in value and very complicated, so it’s important to pay attention to the details. Leave no stone unturned and inspect every element of the properties you buy to make sure you’re getting your money’s worth.
- Location dynamics. One of the most important variables for success in commercial real estate investing is choosing the right location. Invest in a currently undervalued area with explosive potential, and you could multiply your net worth many times over in just a few years. Choose an overvalued area with a propensity to crash, and you could lose everything. Geography is extremely important in all your investing decisions.
- Tenant screening. Generally, commercial real estate tenants are more reliable and stable than their residential counterparts. However, this isn’t always a guarantee, and not all commercial real estate tenants are reliable. Accordingly, you’ll need to have a good tenant screening process in place to ensure you only acquire the most reasonable tenants.
- Risk management. Effective risk management is also crucial to your success in commercial real estate investing. Commercial real estate has plenty of upside, but it also has its share of risk; in this list, we explore risks like financial leverage and broader economic dynamics, but these are just scratching the surface. You’ll need to properly identify and assess risk if you want to be successful.
- Analysis of broad economic trends. It’s not just about real estate; broader economic trends can greatly impact the quality and dynamics of your commercial real estate investments. For example, the recent trend toward remote and hybrid work has in many areas. Being able to properly anticipate and respond to these changing trends is critical for any ambitious commercial real estate investor.
- Effective management. How are you going to find new tenants? How are you going to handle property upkeep? How will you navigate conflicts that inevitably emerge? Effective management can prevent most issues and address whatever issues arise. So are you going to hire a property management company? A dedicated property manager? Your choice has a huge impact on your bottom line.
- Scalability. Even if you’re not planning on becoming a commercial real estate investing mogul with thousands of properties all over the country, you should at least give some thought to scalability. A single commercial property probably isn’t going to be enough for you to achieve all your goals, so what process do you have in place to acquire your next property? How can you scale this operation without losing your mind in the process?
If you can master these principles in your commercial real estate investing strategy, you’ll be much more likely to succeed. However, it’s important to note there’s never a real guarantee of success in any investment area.
With proper due diligence, attention to detail, and support from effective property managers, you could eventually build the real estate empire of which you’ve always dreamt.