Real estate is the most intriguing and time tested investment concept known to humankind. In fact, most people have been exposed to it since childhood when they first started playing the mega-popular board game Monopoly. Investing in real estate oftentimes leads people on the path of wealth accumulation; however, they need to realize that it’s a slow ride, and not an autobahn. Building a solid real estate portfolio takes time and patience. There is certainly a plethora of opportunities out there from which to choose, and it certainly does make financial sense to specialize in one particular area and then branch out from there. Once you become a solid real estate investor in one area, then diversify; otherwise you may end up spreading your time, and finances too short.
Many people begin their real estate investing career by purchasing single-family homes either for quick flips or a long-term rental strategy. Although this an excellent way to get your feet wet, moving on to larger, and more profitable commercial deals simply makes the most sense. You’ll find that a larger commercial deal requires almost the same amount of effort and due diligence as one single-family investment, which makes it even more attractive. For example, if an investor is planning to purchase ten rental units, it makes far more sense to buy a ten-unit commercial apartment building than ten separate single-family purchases. Not only will the purchase price per unit be significantly lower, the operational costs per unit will be reduced as well. That being said, there are a number of things to learn, consider, and decide upon when it comes to purchasing commercial real estate. This guide is a good resource to get you started thinking like a commercial real estate investor.
The very first item to cross off of your checklist is to learn the language of commercial real estate. As they say, if you want to walk the walk, you need to talk the talk. There is a tremendous amount of words and acronyms in commercial real estate that you may not be familiar with, and it is extremely important to learn them. The industry people that you will be working with, such as bankers, real estate brokers, and strategists, will assume that you know the commercial real estate vocabulary. You need to be taken seriously, and a lack of understanding their language will not accomplish that. Here are a few examples.
- Ad Valorem: A tax based on the assessed value of a piece of property
- Cash on Cash: Annual property income over how much you actually invested. The amount invested could be just the amount your down payment was.
- Capitalization Rate (Cap Rate): Property income divided by the total value of the property.
- Loan-To-Value (LTV): A ratio of how much money you’re asking from a lender to the total value of what you want to purchase.
- Vacancy Rate: Percentage of properties that are vacant in a time period in a given area.
Written by GilverBook Team