Both residential and commercial properties can be excellent investment opportunities depending on the market. However, commercial real estate may offer more earning potential, among other benefits.
If you’re looking to take your investing to the next level, here’s how to make the switch from residential to commercial real estate and earn that six-figure income everyone dreams of.
1. Conduct Market Research
Execute due diligence by researching everything you can about the properties you’re considering. Consider potential land investments as well and analyze supply and demand trends in the area.
Identify asset types that are most profitable and offer the biggest opportunity. For instance, you may want to avoid the retail sector since the rise in online shopping has stunted its growth.
2. Recognize the Risks
When you invested in residential real estate, you knew the risks included bad tenants and evictions. However, as a commercial investor, you’ll likely have much more to worry about.
Commercial properties have more public visitors, increasing the chances of someone damaging your property or sustaining an injury. Recognizing and managing these risks can help you avoid legal issues if something were to happen to a visitor or the property, itself.
3. Understand Market Cycles
As a residential investor, you’re likely already familiar with market cycles. When the economy is thriving, the market is high, making it a good time to sell.
However, if unemployment is high and the market is low, you may be able to secure a low buying price. Research and familiarize yourself with indicators of the two market cycles so you can make wiser investment decisions.
4. Know How To Read a Property Proforma
A commercial rental property pro forma is an analysis of an investment’s cash flow projections. They should include an in-depth review of repairs, vacancy losses, property management and other miscellaneous expenses.
However, some pro formas can be misleading, overly simple or too complex and confusing. Thus, knowing how to read and determine the integrity of the seller’s pro forma is essential.
5. Save for the Initial Investment
Moving from residential to commercial real estate will likely require a larger initial investment. Consequently, it can be difficult to enter the commercial market without setting aside savings.
Then, even after acquiring a property, you may end up with heft repair bills you didn’t expect. In this case, it’s wise to have set aside a larger sum of money and ensure that your revenue outweighs the cost of maintaining and improving the property.
6. Know When To Use an Asset Manager
If you’re trying to score a multi-tenant property, consider hiring an asset manager. They’ll manage your assets on your behalf so you don’t have to worry about depreciation, risk exposure or making poor investment decisions.
An asset manager will also watch the market for you and maximize your property’s value so you don’t have to continuously monitor market cycles on top of all your other responsibilities. It’ll make moving from residential to commercial real estate far easier.
7. Hire a Maintenance Team
Commercial properties will also require more time and oversight than residential investments. More square footage, numerous tenants and multiple leases may increase your profit, but they also come with more responsibilities.
Moreover, smaller considerations like which type of garage doors to buy and what wallpaper print to choose suddenly become your problem. Therefore, it may be best to hire a maintenance team to handle more menial tasks for you. They’ll also come in handy in the case of emergency repairs.
8. Prioritize Accessibility
More than 10% of Americans live with a disability, which can increase liability risks for property owners. However, since you can’t discriminate against these tenants, it’s wise to prepare for and welcome them from the very beginning.
Because the demand for accessible accommodation is a growing market, investors that prioritize accessibility will also attract more tenants. Plus, they’ll have the potential to double their net income and enjoy 30% higher profit margins than their peers.
9. Prepare for Setbacks
As with any real estate investment, you must prepare for setbacks when making the switch to commercial property ownership. Inevitably, you’ll have to manage construction, renovations, new systems and other uncertainties that will alter your timeline.
Planning for these setbacks will allow you to plan ahead so you have savings to fall back on if you can’t immediately find tenants or if you must make repairs. Identify potential obstacles and create a plan to prepare for potential delays.
10. Create Contingencies
In addition to having a contingency fund to cover setbacks and surprise expenses, you should also write contingencies into the real estate contract. Some of the most typical contingencies include mortgage approval, insurance approval, the closing date and inspection discoveries.
If the buyer or seller discovers one of these contingencies to be true, they may break the contract. As you bargain back and forth with others in the market, keep this provision in mind.
Moving From Residential to Commercial Real Estate
Investing in commercial real estate can seem daunting, especially if you’re a beginner. However, as long as you tackle each task one step at a time, you should make a substantial profit from this promising business venture
Just be sure to do your research and network with others in the business. Remember, there’s no shame in asking a veteran for advice.
Oscar Collins is the managing editor at Modded. He writes about cars, fitness, the outdoors and more. Follow @TModded on Twitter for more articles from the Modded team.
