Looking for passive income opportunities? For those with ample startup capital, commercial real estate investing is hard to beat.
Commercial real estate comes in many different forms: small-scale multifamily housing, light industrial space, mixed-use retail, high-rise offices. Each segment defines “success” differently—in some cases, wildly differently. These seven secrets to a prosperous career in commercial real estate are by no means the final word on the matter, but they’re at least a good place to start.
- Know When To Walk Away From a Bad Deal
Never get over-eager. Sellers can smell it. If you get the sense that you’re walking into a bad deal for any reason, don’t be afraid to cut bait. Other opportunities will arise.
- Give Back to the Community
Commercial real estate investors don’t operate in a vacuum; they’re integral to the communities in which they live and work. In many places, they’re bona fide pillars of the community.
So it’s only natural that the most successful investors and developers actively give back to their communities.
“The merits of giving back are self-evident. It feels great and tangibly benefits your neighbors,” says Connecticut-based real estate investor Gary Richetelli. “Done properly and without overt self-interest, it can also be a powerful and mutually beneficial branding exercise for your organization and staff.”
Look for opportunities that align with your organization’s goals and values. And don’t force the issue.
- Budget for Maintenance and Repairs
The first rule of real estate investing: Something is going to go wrong eventually.
“One of the biggest mistakes you can make as an investor is to ignore the fact that over time, you’ll have to spend money on the upkeep of the building,” say real estate experts Peter Conti and Peter Harris. “Make sure you have a long-term plan to handle such repairs.”
Just how much you need to budget depends on the property’s age, construction quality, current uses and other considerations. In the long run, expect to put about 1 percent of the property’s value toward maintenance and repairs each year, on average.
- Get To Know the Area
The most successful real estate investors have long since outgrown their home turf. Early on, though, it pays to stick with what you know. Confine your initial investments to a single neighborhood or community, and take every opportunity you can to get to know the area better. Later, you can use your local experience as a springboard to diversify geographically.
- Target Motivated Sellers
You want to walk toward good deals as fast as you back away from bad ones. Learn to spot the telltale signs of a motivated seller: below-market pricing, evidence of financial distress, willingness to offer concessions. Get ready for a brawl; your competition is just as hungry for a sweetheart deal as you are.
- Leave the Heavy Lifting to the Pros
Distressed properties sell below fair market value for good reason: They cost a lot to fix up, and they present a lot of headaches along the way. Ask yourself how much that leaky old gas station or asbestos-ridden brownstone is worth to you. Unless the answer is “I’m in love with that property and would do anything to make it mine,” think carefully before pulling the trigger.
- Bring Plenty of Cash to Closing
Commercial real estate underwriting is very different than residential real estate underwriting. Very different. In particular, first-time buyers are shocked by lenders’ and sellers’ near-insatiable appetites for cash. These days, 30 percent down is table stakes for most commercial real estate transactions. Once you’ve established relationships with lenders and built your reputation as a competent landlord, you might have some wiggle room. Maybe.
Better start saving.
What’s your secret to commercial real estate success?