If you harbor a desire to engage in commercial real estate investing, wide-reaching and lucrative opportunities are available. But the question is not necessarily whether you want to improve your wealth. It’s how to invest without taking a major risk.
Depending on your experience and financial situation, there are strategies that relative beginners can successfully implement and commercial real estate loan financing to help your vision become a reality. The following investment strategies involve varying degrees of investment risk, financing pathways, and a heavy reliance on due diligence.
When residential property owners consider the transition to commercial real estate investing, the seemingly stark differences sometimes deter them. But upon further review, the commercial BRRRR method offers investors enough familiar overlap to feel confident enough to move forward. The “BRRRR” isn’t a reference to winter’s chill and needing to warm up by a fire. Rather, it’s an acronym for Buy, Rehab, Rent, Refinance, Repeat, and that’s a strategy quite similar to residential house-flippers.
The commercial BRRRR approach continues to gain traction because it avoids one of the primary impediments in traditional residential investing. Lenders typically want a 20 percent down payment to approve a loan. By contrast, this commercial counterpart doesn’t necessarily require entrepreneurs and investors to tie up that much cash. The following highlight the key points.
This strategy essentially turns the commercial real estate investing process upside down. By applying for commercial real estate loan financing last, business professionals are able to extract their investment and a profit from commercial property and leverage the money to repeat the business model.
Although developing a parcel from scratch typically creates the greatest opportunity to make a high profit, it also carries tremendous risk. Developers tend to be a rarity because the experience necessary to take a plot of land and turn it into a retail shopping mall, warehouse facility, or industry park involves planning, construction, and financing savvy. If you possess the background or can pull together a small team of experts, these are the common commercial real estate investing steps developers follow.
Once the construction phase gets underway, start marketing the development to potential tenants and/or buyers. Commercial real estate investment focuses on earning a profit and furthering financial goals. Whether you decide to sell or lease the development, base that decision on hard numbers.
Patient investors sometimes prefer to focus on select financial ventures while others take the lead on a land project. The process involves securing a parcel — through commercial real estate loan financing or cash — that enjoys long-term commercial development value. With the right zoning and location, a seemingly passive investment in, well, dirt, can generate a substantial profit.
By slow-walking a project, interested parties can be brought in to purchase the land and development before completion. In some instances, landowners partner with developers who see the project to fruition. Land banking is quite similar to straightforward development but with a hands-off approach.
The moniker given to this commercial real estate investing strategy sounds like a new type of poker. But when orchestrated smartly, the strategy minimizes risk and can prove profitable with almost any kind of property. Business professionals generally select long-term buy and hold property based on the following factors:
Buying long-term hold investments is usually based on the income they generate. Conduct a thorough analysis of existing leases and calculate rising taxes, maintenance costs, and other overhead. It’s crucial that rent escalators are in place to ensure steady revenue exceeds expenses as the commercial real estate loan gets paid down. A well-thought-out buy-and-hold investment positions the property owner with a paid-off commercial building after years of enjoying an income.
Startup businesses operate under passive risks such as landlords selling the building, rent increases incorporated into new leases, or property owners deciding not to offer a renewal. Owner-occupied commercial real estate investing basically flips that script. Your business purchases a commercial building and rents unused space to repay the loan.
Along with a stable working footprint, investors generally gain tax advantages, stable overhead costs, and increased asset diversification. Not only do you own and operate a business, but your organization also possesses a real estate asset. Business decision-makers who are outgrowing a location or paying excessive rent may be good candidates. These are typically commercial real estate loan requirements to consider.
Lenders tend to scrutinize commercial real estate loans to ensure a borrower’s operation can generate the revenue to make repayment consistently. But this commercial real estate investing strategy can deliver enhanced financial security on multiple levels.
One of the sometimes overlooked commercial real estate investing strategies involves the source of financing. Entrepreneurs and investors focused on the property or project may not realize that credit unions offer low-interest commercial real estate loans.
Credit unions are experienced lenders that not only provide access to these loans and other resources, but they also support local businesses of all sizes and are focused on helping their local community thrive. In terms of applying for a commercial real estate loan, perhaps the best way to find the right loan product to serve your goals is to speak with a local lending professional about your unique business needs.
At Carolina Trust Federal Credit Union, we know that sometimes, you need a little extra money to maintain and grow your business, and we get it. Whatever it may be, don’t worry— we’ve got a loan for that.