Investing in real estate can be a heart-stopping experience. The promise of a hefty return is always there, but so is the possibility of losing it all. It takes nerves of steel and a solid understanding of the market to make it in real estate, especially if you choose to focus on commercial properties.
Every commercial property deal has its unique characteristics. But according to the experts at Actium Partners, a hard money lender in Salt Lake City, UT, there are three things common to every deal. They should be considered no matter what type of property an investor is thinking of acquiring.
1. Cash Flow
A major benefit of real estate investing is generating monthly cash flow. Invest in an office building and your leases produce revenue month after month. Investors need to ask themselves what the cash flow on a given property will look like. How much money will come in versus how much goes out.
Some deals represent limited cash flow over the lifetime of the investment. Others show the promise for significant cash flow. Still others start out slowly but build cash over time. Why does it matter? Because real estate investors need to keep a certain amount of cash in reserve. They need to look at each opportunity’s cash flow potential and analyze it against current goals for maintaining a cash reserve.
2. Property Improvement
In the commercial real estate game, properties requiring improvements before they can be leased or their rents raised are known as ‘value add’ properties. There are typically three scenarios that would qualify a property as value add:
- Renovations are required prior to leasing
- Deferred maintenance is preventing higher rental rates
- Landscaping and parking need to be addressed.
All three add to the price tag an investor pays on a piece of property. They are not part of the sale price, but the investor still needs to spend the money before the property will realize its financial potential. Smart investors carefully consider how much they will spend on property improvement. They also do their best to understand the future value of the property once improvements are made.
A high enough value could warrant taking a risk on a property requiring substantial renovations or maintenance work. But if spending the money will not increase property value significantly, investing anyway could put a damper on cash flow.
3. Investment Length
Finally, a generally accepted rule in the real estate game is to hold on to properties for a minimum of five years. Holding them longer offers the promise of higher returns. Here is the question each new property and investor looks at: is holding it for at least five years realistic? If not, walking away might be the better option.
If holding it for five years is realistic, how about considering 10 years? Looking at a property and being able to see a decade of potential makes investing in it more attractive. The downside is that no one can accurately predict the future 100% of the time. So even seeing potential for a decade or more does not guarantee long term profitability.
The common thread in all three considerations is thinking long term. Whether it is cash flow, adding value, or determining how long to hold the investment, investing in real estate is a long-term proposition. It is not a get rich quick scheme. If you are not getting into real estate for the long hall, don’t get into it at all. Put your money into something else that offers a better chance of short-term returns.