How to start real estate investing – Beginners Guide to Get Success

If you want to be a successful commercial real estate owner you can’t be satisfied with amateur knowledge. This is one area of real estate where you require a fair amount of expertise and adequate know-how. Apart from knowing all about the right capital to buy a particular property, you must also have sound knowledge of the market conditions to make a good investment.

To make things easier for all the beginners out there, here are 8 steps to owning a commercial real estate.

real estate investing for beginners

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1. Ask yourself few very important questions

The very first step before you purchase a commercial real estate is to know what your situation is like and what exactly you are looking for. To analyze the situation, it is important to ask yourself the following questions:

  • What kinds of property am I looking at?
  • Am I looking forward to use a building for the business, build equity, rent it out and/or something entirely different?
  • Will I need to buy or can I lease the property?
  • How dependent or non-dependent am I financially?
  • Am I willing to partner with someone else on the property?
  • What is my risk tolerance?
  • What skills or knowledge am I bringing to the table?
  • What kind of property manager will I need?
  • Am I willing to perform the duties of a landlord?
  • What kind of location will I need?
  • Am I ready to make a purchase or investment of the size in question?

Answer these questions honestly before you decide to invest in commercial real estate. They will help you chart out a roadmap to progress further.

2. Understand the risks and benefits of owning a commercial real estate

Tax liabilities on the huge profits that you make in a given year can be offset by claiming property depreciation. However, you gain from asset appreciation over time when owning commercial property so your company’s equity grows.

A major risk involved in buying commercial real estate is that the value of location may go down because of the changing trends. A location that is considered hot in a given year may lose its charm the very next year and this may considerably reduce the value of the property. Besides, your liquidity is at stake since it is hard to sell a commercial property in tough economic situations.

If you are planning to rent out your commercial property you need to make adjustments for vacancies, late payments and payment defaults.

3. Learn commercial real estate vocabulary

Like in any other business with a niche audience, even real estate has lots of vocabulary that you will have to keep handy. This will help you look and feel like a real estate savvy.

Here are some frequently used terms:

  • Debt service coverage ratio: This refers to how much debt you will be able to cover each year with the income.
  • Loan-To-Value: This refers to the ratio of how much money you are asking from the lender compared with the total value of what you wish to purchase.
  • Vacancy rate: This refers to the percentage of vacant properties per time per area.
  • Capitalisation rate: This refers to the income from the property divided by the value of the property.

4. Visit more than one property

It is important to visit and consider different properties instead of focusing on the first property you visit. Each time you visit a different property, analyze which one would work the best according to your plans. Some of the most important things to consider include price, condition, location and the allowed uses.

Make sure you also measure the value of each property by finding out:

  • What the property was/is being used for
  • What it can be used for
  • What kind of taxes are charged on the property
  • Why the owner is willing to sell the property
  • How the area around the property is growing commercially

5. Get experts to advise you

Finding and buying commercial real estate is a complex process, which will make it quintessential to need the knowledge of an expert. Look for an accountant, a commercial real estate lawyer, mortgage broker and a commercial realtor.

A more complicated real estate will need tax experts, lawyers, accountants, appraisers, notaries and/or engineers.

6. Figuring out the finances

You will need to find out what kind of banks, mortgage companies or credit unions you will need to use. Some other things to consider are:

  • Kind of credit you have
  • Kind of interest rate the financial institutions can offer
  • Willingness of the owner/seller to help you with financing
  • Alternatives to finance a commercial real estate purchase

7. Take lawyer’s approval to make the offer

You will need a lawyer to sign the letter of intent (LOI) about the property and all the contracts involved. Ensure the LOI is not binding. This will save you a lot of headache if you decide to let the deal fall through. Also, gather details of the written agreements so that you know all the rights and obligations.

It is imperative you partner with a lawyer who has considerable experience in commercial real estate dealings.

8. Concluding transaction

Below are the last steps to be taken for the completion of the transaction:

  • You will have to order ALTA (American Land Title Association) survey that will be used in the form of due diligence. Such a survey offers important information, like the location of the property, the boundary lines, location of secondary buildings and identification of access rights by different service providers.
  • Before the transaction is made, you will need an escrow officer who will be the 3rd party who overlooks the transaction. The escrow officer not only looks over and helps with transfer of funds, he also ensures that both the parties involved are protected.
  • Finally, the buyer i.e. you will be given a due diligence time frame within which you must make sure that all the documentation regarding the property is accurate. If something unwarranted comes up during the inspection, you may cancel the transfer of funds.

Now that you know the steps involved in owning commercial real estate, go right ahead and be a proud owner.

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