Investing in Commercial Real Estate Part 9: The Most Critical Principles for Success

As with any endeavor, there are a few key principles to keep in mind. While there are no guarantees in real estate investing, there are ways to stack the odds in your favor. Keep the most important factors in mind at all times.

Four factors can increase the likelihood of success:

1. Search for a great price or great terms. If possible, find a deal that offers both. Finding a good deal in commercial real estate is much more challenging than when shopping for your personal home. However, most commercial deals are fair. It’s all in the numbers. Ensure that the numbers are accurate.
2. Avoid costly early mistakes. An experienced investor with $10 million in her bank account can absorb a mistake or two. Those with more moderate means have less of a cushion.

• Start small. Do a small deal. Learn how to evaluate a property and find the best financing. Get to know the people behind the deals. If your first deal is profitable, be a little bolder the next time. There’s no rush.

3. Stick to reasonable capitalization rate properties. Reasonable can be defined as 8-15%. High cap properties are often in poor areas and represent a higher risk. Properties with low cap rates are low risk, but the returns are also low.
4. Purchase properties with a cash-on-cash return of at least 10%. This is a measure of how long it takes to get your cash back in your pocket. If you put down $50,000 on a property, how many years will it take the cash flow to return that down payment?

Be honest with yourself when compiling your numbers and evaluating the property. It can be tempting to cheat a little when you like a property. Avoid the temptation! Be objective and allow the numbers to guide you. Be patient.

“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.”

– Andrew Carnegie

Thanks for reading! We’ve got one more installment of this series headed your way later this week. As always, reach out any time you want to chat about your real estate investment journey.