We’ve already gone over part 1 of our guide on what to consider before buying your first commercial property. In this second part, we’ll dig deeper into various investment strategies to better prepare you for finding and buying the right commercial properties.
Have You Chosen an Investment Strategy?
Buying commercial property isn’t something you can do to ad-hoc. That is, you need an investment strategy that enables you to reach your ultimate goals. By choosing a strategy, you’re creating a framework on which you make sound investment strategies.
In part one, we briefly went over some popular investment strategies:
- Land Banking
- Passive Investing
While each of these is a perfectly suitable investment strategy, we’re going to focus on the first three listed. These three strategies demonstrate a range of time- and money-intensive ways to help your commercial real estate portfolio
What Is the Development Investment Strategy?
The development investment strategy is for those tolerant of high quantities of risk. It has the potential to generate the most amount of wealth. That potential, though, is paired with an equal possibility of losing your whole investment.
With development investing, you must have a vision because you’ll be turning raw land or existing property into something entirely new. You’ll need to rely on your team and stay informed to ensure you’re following the right process for success:
- Buy the Land – You’ll need to consider demographics, topography, traffic, utilities, zoning, and, of course, location, to choose the right property for purchase.
- Create the Site – Your team of architects, engineers, and sales will help you craft marketing strategy, design the building’s layout, and determine project feasibility.
- Secure Financing – Presenting your team, financial partners, and project history will help you get any additional funds you need for the project.
- Supervise Construction – Picking the right general contractor is critical to ensuring the project is built along the stated timeline and up to your standards.
- Market the Property – Getting pre-sales and pre-leases can help develop sales momentum and reduce risk.
What Is the Land Banking Investment Strategy?
If development sounds too hands-on, you should consider a land banking investment strategy. With this strategy, your goal is to secure a property that sits in the way of a current or growing development. Your property will increase in value as the development expands towards your land. Once the development runs up against your property, you can sell it to the developer or partner with them on their expansion.
This investment strategy requires little work on your part. The process is straight forward, with some upfront research paying off in long-term wealth growth:
- Qualify the Land – Do your research on the city’s zoning laws, as well as their intentions for public or private property, to identify undervalued land that future developments may need for growth.
- Decide on Financing – There’s flexibility in this strategy to purchase the property in cash or secure outside financing.
- Prepare for the Future – To keep your land highly valued, make sure to maintain its aesthetics as needed. If you find yourself itching for some action on your property, you can start to think about developing it yourself, which may add to its value should a developer find they need it more.
What Is the Value-Add Investment Strategy?
Value-add investing is ideal for people who want to keep their money moving. With development and land baking strategies, you’re often left waiting to pounce either on a property or opportunity. The value-add strategy helps you develop a continual cycle of buying, rehabbing, renting, and refinancing.
- Buy a Property – You want to purchase an undervalued property for this strategy to work. Some distressed-seller situations are suitable for finding those types of properties.
- Renovate the Building – Renovation here doesn’t mean tearing down the walls and starting a new. Updates like interior and exterior paint, new flooring, and modern lighting can add perceived value without being too much of a financial investment.
- Rent Units – Finding a property management company can help find suitable tenants and keep them happy.
- Refinance Your Investment – If you’ve done the above steps right, you’ll be able to refinance based on the capitalization rate and pull your initial investment out of the building while still receiving income from rental units.
- Repeat – Now that you’ve got your capital back from the initial investment, you can do this process all over again and add more properties to your portfolio.
Are There Other Investment Strategies?
The two investment strategies we mentioned in part one that we didn’t yet delve into deeper are wholesaling and passive investing. Both strategies have their advantages, especially if you’re not looking to manage or develop a property.
With wholesaling, you’re looking to find existing commercial real estate properties that are undervalued. Once identified, you purchase the property, then sell it to either another real estate investor or an owner-occupant. Your goal isn’t necessarily to fix, rehab, or renovate the property. Instead, you simply want to engage in commercial property buying because its location, property class, or asset type indicates the property is worth more than you paid for it.
Passive investing is very hands-off. With this strategy, you purchase property, or partner with others to purchase property, without becoming responsible for managing the property. This type of investing can be done through investment tools like Real Estate Investment Trusts (REITs) or even real estate crowdfunding. Your passive investment then leads to passive income.
What Else Should You Consider Before Buying Your First Commercial Property?
Buying your first commercial property can be a daunting feat. With the right investment strategy in place, though, you can make informed decisions about where to place your capital.
Image credit: Shuttershock / Kunal Mehta
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