How to Get into Commercial Real Estate: 6 Critical Points

In terms of how to get into commercial real estate, you need to know a few things: what it is, the benefits, profit strategies, choosing the right property, funding, and more. Learn about these fundamental factors below.

Main Takeaways

• Investors can most easily get into commercial real estate through multifamily properties. To do this, they can construct a new property or buy one in presently good condition. Or, they could try the BRRRR method, the house flipping method, or the buy-and-hold method.
• To find the right property, consider your location, necessary calculations, and financing type.
• You should get the assistance of specialists, like property managers, contractors, and others.

Table of Contents

• What is Commercial Real Estate?
• How Investors Can Benefit from Investing in Commercial Properties
• Figure Out Which Commercial Real Estate Profiting Strategy Works for You
• How to Choose the Right Investment Property
• Professionals You Need on Your Side
• Getting a Commercial Real Estate Loan to Buy Your Property

What is Commercial Real Estate?

As Baltimore hard money loan providers, we see commercial real estate used for non-personal, profit-building, and business purposes, such as:

• Stores and shopping centers
• Warehouses
• Hotels
• Medical facilities
• Storage facilities
• Amusement parks
• Sports stadiums
• Restaurants
• Factories
• Mixed-use properties (properties used for multiple commercial purposes, like restaurants and shopping)
• Office buildings
• Multi-family real estate

Note that single-family homes and multifamily homes under 4 units do not count as commercial real estate. Instead, they fall under the category of residential real estate.

Furthermore, office buildings come in three classes:

• Class A: New or newly renovated buildings in high-demand areas.
• Class B: Older buildings in good condition, but in need of a minor facelift. As such, they can have lower prices.
• Class C: Older buildings in poor condition and less-than-ideal locations.

How Investors Can Benefit from Investing in Commercial Properties

The data shows that now is the time to invest in Maryland properties, and you should act on it fast. Here’s why:

Multiple Tenants

Unlike residential real estate, commercial real estate attracts multiple sets of tenants or customers at the same time. In turn, that multiplies your cash flow.

What’s more, this feature adds security. After all, if you lose your residential property tenant, you’ve just lost your entire income from that property. However, with commercial properties, you don’t put all your eggs in one basket. If one tenant moves out, you still can fall back on your other units’ income.

This model’s benefits shine in multiple ways. First off, if you encounter economically uncertain times, having diversified income streams can help you make it through the storm.

Furthermore, commercial leases tend to last longer than residential ones, like 2 or more years, which prolongs your income. Plus, if you ever want to sell your property, its built-in potential for stability can boost its value.

Tenants Can Share Your Property-Related Costs

As a bonus, with multifamily properties in particular, tenants can share payment over ownership duties, like property upkeep, insurance, taxes, and other fees. This type of lease is called a “triple net” lease and puts much less of the onus for these burdens on you.

Tax Benefits

Commercial real estate comes with several tax benefits, from yearly depreciation tax deductions to 1031 exchanges, and others.

Opportunities for Extra Monetization

You can add extra streams of income into your existing ones, like vending machines, washing machines, and other additions. What’s more, these little extras add value to tenants and customers.

Figure Out Which Commercial Real Estate Profiting Strategy Works for You

For many investors dipping their toes into the commercial real estate realm, it’s a good idea to start with one multifamily rental property. After all, it’s the closest type of property to simpler, residential ones. Furthermore, people always need a place to live, so it’s a fairly failproof investment.

To do this, you could go the old routes of constructing a property on empty land or buying one in good shape. However, if you want to try something a little outside of the box, here are a few strategies you can use to maximize profits:

Buy-and-Hold: With the buy-and-hold strategy, you buy land and hold it until it appreciates. This way, you play the long game but earn a bigger ROI in the end.

BRRRR: Here, you buy, rehab, rent out, refinance, and repeat to earn profits and fund more investments.

Property Flipping: Using this strategy, you can buy a home for cheap, renovate it to boost its value, and sell or rent it for more than you got it.

How to Choose the Right Investment Property

When making your way into commercial real estate, there are many factors you should consider. Make sure you find a property that meets these criteria:

Picking the Most Suitable Location:

Make sure your location matches your tenant type. For example, if you want to invest in a multi-family property, its ideal location will look a bit different from what’s best for other commercial investments, like malls. For instance, malls may best succeed in a city’s downtown area. However, that same area also brings with it lots of crowds and noise, which would deter live-in tenants.

Then, once you choose your neighborhood, research what similar properties there sell for. Make sure the square footage, style, and other factors are like your property’s. This will give you a good idea of how well your property would do.

Also, scan nearby planned developments for how they could complement or compete with your property.

Other factors you should consider are the local market conditions, area taxes, quality of schools, and other factors.

Calculations to Remember

Next, you need to use the appropriate calculations to scope out a property’s potential profitability.

Value per door: The value per door calculation pinpoints a building’s value from its number of units.

Payment Per Square Foot: Commercial renters or buyers pay for their share of a property per square foot.

Net Operating Income: This calculation factors in basic costs and income from your property to see what you’ll ultimately earn at the end of the day.

Debt Coverage Ratio: The Debt Coverage Ratio calculates whether your income will be enough to cover your loan.

Cost approach: The cost approach shows the funds you would need to rebuild a property from the ground up.

Cap Rate: This calculation finds the value of properties that bring in income.

Cash-on-Cash: The Cash-on-Cash metric gives you your ROI on your transactions, like loans.

Professionals You Need on Your Side

Commercial real estate has so many working gears that you can’t handle them all alone. So, consider working with these groups:

• Property Managers: Local property managers, by necessity, have expert knowledge of the demands, preferences, and needs of tenants in their given location. So, you should consider learning from their expertise. Furthermore, when you’re finally at the renting stage, they can maintain your property and tenants so you can have a passive investment.
• Insurance Agents: Insurance agents can protect you in the event of property damage, liabilities, and other issues.
• Lawyers: A lawyer will be indispensable to making sure you stay compliant with all applicable laws and regulations. In addition, they can make sure you get the best deal possible.
• Lenders: Your lender may have a few pointers in their arsenal about the real estate industry, especially if they’re local and real estate industry-based, like us.
• Accountant: Accountants can crunch the numbers to prepare your taxes and budget. This way, you can avoid any costly errors or missed costs.
• Fellow Investors: If you are just getting started in commercial real estate, it might be helpful to have the perspective of people with more experience in the business. So,
• Contractors: Contractors will help you rebuild your property or build it from scratch. They can run the gamut from disastrous to transformative, so research them carefully before committing.

Getting a Commercial Real Estate Loan to Buy Your Property

It goes without saying that you can’t buy your property if you don’t have the funding in hand. So, you will need to secure financing, like a commercial real estate loan, before moving forward.

There are 7 main ways you can secure funding for a commercial property. Here’s a sample of them:

FHA Loans

The Federal Housing Administration (FHA) backs some rental property loans. The FHA permits lower deposit rates for those with high credit scores, which makes them a popular choice for people in that credit group. However, this commercial real estate loan is only available if you plan on moving into the bought property yourself soon after purchase.

Residence-to-Rental Property Conversion

Should you decide to rent out your current home, you can benefit from a discounted down payment.

To do this, you need to change your home into a rental. In addition, since other people will be in your space, you will have to purchase a new place to live.

Seller Financing or Rent to Buy

If you buy commercial real estate from private sellers, you could have an easier time with the initial financing. In essence, many of them sell hundreds of units at once. As such, they may have non-deposit-based systems ready for financing. In addition, rent-to-buy schemes work similarly.

On the other side of the coin, this method requires that you gain high property equity quickly. So, as a result, you’d have to charge tenants higher rental payments. This could deeply harm your ability to find tenant rental income to pay off your mortgage.

Hard Money Loans

Hard money loans are a type of short-term, private, asset-based commercial real estate loan. They are more flexible in terms of criteria than traditional loans. Since hard money lenders are independent businesses, they don’t have to stick to the same, old, standardized criteria. Instead, they can judge candidates on a case-by-case basis. Also, you can receive and pay back this commercial real estate loan at more expedited rates.

However, these loans aren’t intended for disorganized borrowers. Everything, from the timeframe to the fees, is accelerated with hard money loans. If you can’t set up your loan and interest repayments within those boundaries, you will be in debt.

Learn How to Get into Commercial Real Estate with MHML

If you carefully select the right location, strategy, funding, and other features, you can gain an entirely new income stream. You can find the property that kickstarts your career in commercial real estate.

However, finding that perfect entryway into commercial real estate requires the perfect commercial real estate loan. Luckily, Maryland Hard Money Lenders has a team of reliable, trustworthy hard money lenders with several years of experience. So, if you’re looking to secure a top-of-the-line commercial real estate loan, look no further than Maryland Hard Money Lenders. We’ll stick with you every step of the way to ensure you’re meeting your goals. Contact us today to fill out a loan application or learn more about our lending process.