Investing in commercial real estate is becoming an extremely popular way for investors to expand and diversify their portfolios.
Commercial real estate (CRE) investing is widely accessible, too, thanks to the popularity of websites that will list commercial land for sale.
It is still very intimidating despite the accessibility allowing beginners to join the CRE investment industry.
You will only really see profits from real estate investing when you know what you are doing. One of the drawbacks of commercial real estate investment is its high risk and high reward.
With that being said, here are 5 crucial steps to follow when buying commercial land as a beginner.
Step #1 – Educate Yourself on the Details of CRE Investments
As previously mentioned, one of the best ways to ensure that your investments will succeed is to become as knowledgeable about CRE investing as possible.
Fortunately, many resources can help beginners learn about investing in today’s Internet era.
Here are some ways that beginners can educate themselves on commercial real estate investment:
- Listening to investment-based podcasts;
- Reading CRE books;
- Watching Youtube videos;
- Having discussions with experienced investors;
- Joining real estate investing groups.
Meeting up with others who have experience with CRE investing, whether it’s through joining a group or finding connections through other means, is a great way to learn.
You’ll be learning about commercial investing through those who have the experience.
They can pass along useful tips and share what they learned as they gain more experience in the industry.
Don’t Forget to Educate Yourself on Zoning!
Education on zoning laws is also extremely important before diving into commercial real estate investment.
The last thing that you want is to purchase a piece of land, only to discover that it is not in the right zone for commercial properties.
Property zoning and usage laws can be extremely complicated, and there are specific zoning laws for each kind of property type, which will be discussed in the next point below.
As you are doing research on the land you are potentially going to buy, you should educate yourself on the zoning laws for the property as well as the area.
Step #2 – Discover the Right Property Type for You
There are 5 different types of commercial real estate properties, and investors need to choose just one of these types to become their niche.
When you only focus on one property type, you are more likely to have the expertise necessary for success.
The 5 types of commercial real estate properties are:
- Multifamily: These properties can range from a single duplex with two units to hundreds of units that are spread out across a larger apartment complex;
- Office: Office buildings can be your typical large office building or can be a commercially zoned house that someone works out of;
- Retail: This is anything from a small local coffee shop to a large shopping center;
- Industrial: Industrial real estate typically consists of warehouses or distribution centers. Amazon delivery is an example of this;
- Hospitality: Buildings that are considered to be hospitality real estate are hotels, motels, and short-term rentals;
These types of properties are then split up further into 3 different class gradings:
- Class A: The highest quality buildings, typically new with great construction quality and location;
- Class B: May still be high-quality but are a bit older or cost less than those in Class A. These buildings have great flipping and restoration potential;
- Class C: These are old and low quality. They usually will need maintenance and do not have an appealing location.
Obviously, which class you are aiming for depends on your budget. You may want to focus on finding a property or piece of land in an excellent location.
You can always renovate and improve a building, but you can never move a building to a better location.
Step #3 – Get Pre-Approved for a Loan Early in the Process
Being new to CRE investing means you may not have the necessary finances on hand, meaning you’ll need to take out a loan.
Taking out a loan for commercial property or a piece of land is different than if you were taking out a loan for residential property.
The qualifications for these loans are much stricter; in some cases, you may need to put down as much as 20%.
You should also research as many banks and lenders as you can. That way, you can learn which ones specialize in giving out loans for those who wish to purchase raw commercial land.
Step #4 – Work With Another CRE Professional
Commercial real estate investing is a very complicated process, and it can be extremely overwhelming for a beginner.
That’s why it’s recommended to contact professionals to help you with the process, especially when you are buying commercial land.
Buying land may be a little easier than building a commercial building outright. Still, land specialists and other commercial real estate professionals can help you determine which pieces of land work best for you and your portfolio.
Some other professionals you may want to consider working with include a:
- CRE Realtor to help with research and negotiation;
- Real Estate Attorney to ensure that you are protected during every step of the process;
- Accountant to help you with finances, including budgets and tax documentation;
- Mortgage Broker, which will help you significantly with your loan process;
- Contractor, such as concrete forming companies to work with during any construction;
- Property Manager to assist you with the property and manage any repairs or issues.
The more help you have with your first time buying and investing, the more likely you are to succeed.
Step #5 – Practice Your Due Diligence
Due diligence is a large part of CRE investing. When you’re practicing your due diligence, you’re ensuring that you meet all the legal requirements involved in the process.
Essentially, you will be evaluating the property’s location and comparing it with other properties in the area. You will also be assessing the condition of the property.
You should also visit the piece of land before your final purchase. You’ll be able to see things like topography and sloping that you may not be able to see when just looking at photos.
Environmental tests are also necessary to see that there are no hazardous materials or issues with underground tanks and pipes.
Getting on top of issues before they get worse will help you financially in the long run.