Commercial real estate investing may seem tempting as a way to build wealth. However, understand that it may take quite a while to realize a profit from your real estate investment. Many investors begin their career in commercial real estate investing by buying smaller investment properties and gradually working their way into larger real estate investments. Commercial real estate investing can result in the sort of lifestyle you desire, but there are risks involved. Real estate investing may also destroy your credit and finances. Understanding a few keys to commercial real estate investing can help you avoid the pitfalls associated with it, particularly in a volatile housing and real estate market.
Most successful real estate investors advise that potential investors make themselves aware of the risks associated with investing and to have a plan with a specific goal. This includes knowing how long and for what purpose you want to acquire investment properties. As with any investment or business opportunity, a strategy is vital.
Put Your Own House in Order
Before embarking on the potentially lucrative, yet risky career of acquiring investment properties, put your personal finances in place. Good credit, typically defined as low credit card debt and consumer debt, means you have a better chance of getting a good loan in order to purchase investment properties. Banks and other lenders sleep better at night knowing that they've loaned money to prudent investors who know how to repay their debts. Unfortunately, a higher percentage of real estate investment borrowers tend to default on their loans than other borrowers. As such, you can expect larger down payments and higher interest rates no matter how strong your finances.
You should also strive to have a cash reserve after purchasing an investment property to pay for unexpected repairs, as well as to cover vacancies and lost rent. Most prudent investors also carry a line of credit, which goes only to those with strong borrowing potential, in order to cover large repairs or other major costs.
Finally, after putting your house in order, do not allow it to stand alone on the shifting sands of the real estate market. While the income you realize from investments can supplement your finances, do not plan on the income replacing all of your other investments and plans for the future. Property values rise and fall at the whim of the market, and having other resources will allow you to ride out the bad times.
Know What You Want
Know what you want to buy, why and for how long. Have a certain criteria for investment properties, including size, location and type of property. Different investment properties require a range of skills and knowledge, and they offer varying degrees of financial return. It is a good idea to know your own strengths and buy properties that fit them. Observe and understand your local real estate market, carefully identifying investment properties that are within your financial reach and fit your plan.
Consider how long you plan to own your investment property before purchasing it. If you plan to own it long term, you should invest in necessary maintenance and improvements. Long-term investments also tend to appreciate over time, meaning you might lose money in the short term, so plan accordingly. Most beginning investors are by definition small investors, meaning that a long-term ownership scenario will realize the most return.
Another key aspect of your plan should be to cultivate a network of associates within the investment properties field. Be on good terms with city clerks and lenders who know when properties are hitting the market. Develop relationships with real estate agents who are willing to stay abreast of available investment properties. You can also join local landlord or owner's associations.
Know What It's Worth
Your success also depends on your ability to value an investment property. The value you might realize from an investment property depends to a large degree on its condition, what you need in returned profits and your financial borrowing ability. Never overpay for an investment property. Paying too much makes it much harder to make your profit when selling it or to cover your investment through rent, particularly given the ebb and flow of the real estate market. While homeowners might be able to get away with overpaying, real estate investors rarely do.
The key to understanding the value of investment properties is the ability to understand real estate appraisals. Real estate appraisal is the accepted practice of arriving at an opinion of a property's value. Real estate appraisals are performed by certified appraisers, who generally base their determination on the market value of the property. The appraiser arrives at the determination of value by comparing the property to similar properties in the area, as well as determining the actual condition and potential of the property itself. Understanding the real estate appraisal can give you a good idea of whether you are getting a good deal in the purchase of an investment property and whether it has the potential to return the investment you desire.
Entering into the world of real estate, whether as a homebuyer, new business owner, real estate agent or any number of real estate related fields, requires learning a new vocabulary. Learn the most popular real estate terminology so you can be well on your way to sounding like you know what you're talking about.
Real estate appraisers can be a real benefit to buyers, sellers and even to homeowners.
Before you plunk down your hard-earned cash for what seems to be the perfect home, step back and take time to consider the following.