Investing in commercial real estate is a great way to make a profit if you approach it correctly. Many people start off by investing in residential real estate and then work their way into the commercial market over time. Though there are similarities to the two markets, there are also differences. If this will be your first time investing in commercial real estate, here are a few guidelines to follow to ensure you don't end up in over your head.
1. Start slowly.
In residential real estate, you often have to accumulate many properties before you begin making a significant profit. Sure, you can learn a little from each investment, but your mistakes don't typically cost you very much since the properties you're buying are typically pretty cheap. In commercial real estate, things are different. Property values are much higher and the rental process is more involved, so there is a potential for an error to cost you a lot more money. For this reason, it's important to start slowly. Invest in one property, and take your time with it. Only move on to investing in additional properties once you've "hammered out the kinks" in your process via the fist one.
2. Pick an industry you know.
When you start shopping for your first commercial property, look for properties in an industry with which you are at least familiar. For instance, if you used to work in retail, purchasing a storefront will feel more familiar to you than buying a restaurant. If you have experience in milling, perhaps buying a wood mill would be right for you. Not only will you have a better idea of what you're looking for in a solid structure, but you'll have a better idea what renters in the industry are looking for.
3. Get estimates for any major improvements before you buy.
As you gain more experience in commercial real estate, you'll learn what certain improvements cost and you'll be able to make good judgments as to whether or not certain properties are worth buying when they need those improvements. But for your first property, it's best to err on the side of caution. If you are considering a property that needs some major improvements, get estimates for those improvements before you agree to a sale. This will keep you from accidentally overpaying and digging yourself into a hole with your first investment. If repairs will be costly, do not hesitate to make the seller an offer far below their asking price. The worst they can do is say "no."
4. Make sure your own assets are protected.
If you are not already making your real estate purchases under an LLC rather than under your personal name, it's important to make this change as you begin investing in commercial real estate. An LLC, or limited liability corporation, is a business structure that you can easily open with some guidance from your attorney. Then technically, your "company" will buy the properties, collect rent, and pay applicable taxes.
The advantage of opening an LLC is that if your investments plummet and you end up having to file bankruptcy, the banks and IRS cannot come after your own personal assets. Plus, there are tax benefits to making your investments through an LLC; you'll typically pay fewer federal and state taxes with this setup.
If you ease your way into commercial real estate investment, stick with industries you know, get estimates for repairs, and buy through an LLC, you'll be more likely to have success as an investor. To learn more, speak with a commercial real estate attorney at firms like Hornthal Riley Ellis & Maland LLP.
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