Mitch Vandergunst of London, Ontario, began investing in commercial real estate years ago and has since built a thriving business. He learned quickly that commercial real estate works differently than most other investments, including residential real estate. Here are a few questions to help one determine if commercial real estate is right for them.
Commercial real estate requires more cash on down payments, as well as plenty of extra cash for maintenance costs. When financing a commercial property, most lenders expect to see several months (6-12 months) of operating costs saved in a business checking account.
The assumption, based on hard data, is that commercial real estate is a riskier investment. Depending upon the investor’s research on location, asking price, etc., commercial real estate can generate handsome returns at a lower risk. This investment research can help buyers secure a better loan, but at the end of the day, lenders still require a significant amount of liquidity from day one to protect their investment, notes Mitch Vandergunst.
If one is working with a real estate investment team, it may make more sense to invest in commercial over residential real estate. Not only can team members pull their resources to secure a larger down payment and initial capital amount, but they can also pull their experience and professional skills to build a sustainable business.
That said, investor teams should establish ground rules and operating procedures. When partners are also friends, it can be tempting to do business on verbal agreements. Commercial real estate investor teams should work with a business attorney to draft their policies and procedures in writing.
With commercial real estate, there is a greater opportunity for sizable financial payoff, says Mitch Vandergunst. This investment level ensures that all team members enjoy larger dividends. By contrast, residential real estate may not be able to generate the kind of returns to keep team members interested in a long-term partnership.
Successful commercial real estate depends on market trends, local trends, tenants, city planning, and more. Any number of external factors could cause a commercial real estate investment to plummet or soar.
Investors that enter a new volatile investment market can maintain their overall net worth by diversifying their portfolio with more stable investments. Nurturing a diversified portfolio helps the investor remain calm if their commercial property suddenly drops in value. In time and with strategic improvements, the commercial property will increase in value, and the investor can realize those returns instead of offloading the property in a panic, says Mitch Vandergunst.
Managing commercial properties is usually more challenging than managing residential properties. For example, a strip mall owner must manage tenants, along with the liability associated with a tenant’s customers. Maintenance costs are typically higher also.