6 Steps To Start Building A Commercial Real Estate Portfolio
Investing in real estate offers a variety of options; You can buy real estate-related stocks, rent real estate, participate in crowdfunding deals, or flip houses. One option that will always remain popular is Commercial Real Estate (CRE).
Although CRE is generally high risk, it also leads to high reward and encompasses a wide variety of property types that you may not even have known about. You may be confused about what CRE entails and, in simple terms, it is any real estate intended for making money, such as an apartment building. B. Industrial warehouses, retail stores, office buildings and even hotels, storage rooms and casinos.
Let’s say you want to expand your investment portfolio. In this case, commercial real estate is a great place to start because of its high income potential, tax advantages, relatively low competition, and lower turnover, among other things. Here’s how you can start building your portfolio:
Clarify your goals and your investment strategy
When making an effort to acquire a real estate portfolio, you need to meet your financial goals. That is why you need to be sure of what you want to achieve, whether it is more financial freedom or a steady stream of income.
This direction is entirely up to you and determines your investment strategy. You can consider several strategies, such as: B. a fix-and-flip strategy, a buy-and-hold strategy, or even buying and renting a property for a profit.
Also, if you’re looking for passive income, you can consider REITs, much like you invest in stocks. It is a good idea to choose an investment strategy and follow it. If you want to diversify, you can consider doing so later.
Create an investment business plan
Once you’ve got your strategy in place, it’s time to come up with a plan. This will seem like a tedious process at first, but it is time and effort that will be well worth it later. It will help you clarify your short term goals and bring you closer to your long term goals.
Apart from that, the business plan is also useful if you want to bring partners on board. Researching a plan before your first investment opportunity can help convince potential partners that you are serious about this.
Time to buy your first property
This is the moment you’ve been waiting for. Investing in your first commercial property. It is important to have experts such as a real estate agent on board to make the right decision. Finding out what funding options you have is also incredibly important. You can consider loans such as traditional bank loans, hard cash loans, and joint venture loans.
An excellent option to watch out for is mezzanine loans, which combine debt and equity and give you instant liquidity to avoid prepayment penalties. Once you’ve found a property that caught your eye, you need to conduct an investment property analysis that will help determine whether or not your decision is financially viable.
Collect more properties
Over time, it’s important to invest in more properties and expand your portfolio. However, this is not an easy task as monitoring and managing various properties can quickly become a challenge. It is important to make sure that you always have an overview of your portfolio and keep it organized.
Fortunately, there are plenty of ways to organize your portfolio and make it easier to manage. A real estate investment spreadsheet is a great way to keep track of your income and expenses and measure the return on your investments. In addition, you can check out apps that you can use to manage all other investments as well.
Find out how to diversify your portfolio
There will come a time when you need to diversify your portfolio. Basically, having a diversified portfolio will help you spread the risk of your investments and there are a number of ways you can do this including:
- Asset class diversification: Once you’ve focused on a specific rental property, you can expand into other commercial spaces or apartment buildings. It would be helpful if you also considered renting out retail or office space.
- Diversification of the investment strategy: If you’ve invested primarily in real estate, take a look at real estate mutual funds, real estate ETFs, or REITs.
- Diversification of the real estate market: Once you’ve confined yourself to a specific neighborhood, you can spread the risk by exploring other markets and considering remote investments.
Measure the success of your portfolio
Over time, you need to determine how you are doing by measuring the success of your portfolio. While you can consider the simple approach and hire a portfolio manager, you can also explore the DIY approach and calculate a number of metrics yourself. These are:
- Net cash flow: The annual difference between the income and expenses of your property. It takes into account expenses such as ancillary costs or unit maintenance, as well as debt service payments.
- Economic vacancy rate: Helps you decide if you should increase your rent. You can also compare it to the average vacancy rates for other properties in the area.
- Cash-on-cash return: Divide your cash flow by the original investment to see how your investment performs in real time. You can compare this metric to other properties in the area to see how your income is doing.
Once you get the hang of it, you’ll be amazed at how commercial real estate can improve your investment strategy. While it’s not an easy task, it does result in significant rewards. By following the steps above, you can get a kickstart on building your commercial real estate portfolio and build a steady stream of income with these smart investments.