Are you considering buying commercial real estate investment property? You are not alone. Commercial real estate is a wealth building machine as long as you do it right. However, investing in commercial real estate, though there are a few similarities, is strikingly different from residential real estate investing. So, if you are going to make the leap, I suggest you find a commercial real estate mentor. Here are three reasons why.
Education
Because commercial real estate is vastly different than residential, you need education to help you understand the differences between the two. Sure, you can get this information in books and through seminars, but having a mentor at your side will help you determine how those differences affect the success of specific deals.
A mentor can help you understand:
- Creating a power team – Who should be on your team and how to find them
- How to value commercial properties – Commercial property gets its value by producing income, and there are several formulas that can determine value such as cap rate, debt service coverage ratio, cash on cash, and more.
- Pro forma vs actual numbers – Why it matters which numbers you use and how to determine when it is okay to use pro forma numbers.
- 3 kinds of due diligence – How to perform legal, financial, and physical due diligence.
- Different funding options – Determining whether you should use permanent financing, private loans, seller financing, crowdfunding, partnerships, or other creative funding sources.
- And more
Be a Copycat
There is no need to reinvent the wheel. You are not the first person to invest in commercial real estate. So, rather than learning from your own costly mistakes, learn from the mistakes and successes of your mentor.
Although you need to act like a professional investor, you don’t have to have years of experience to do so. Your mentor can pass along what they know to you, guiding you through the steps, and helping you be successful.
When you align yourself with a successful mentor, you will be given:
- Insight to point you in the right direction
- A blueprint for how the mentor creates deals
- A system for finding properties, following up with sellers, running numbers, making offers, conducting due diligence, and getting to closing
- Risk mitigation strategies
- Success tips
Create a Sound Plan
If you have been involved in residential real estate, then you understand how valuable a plan, including an exit strategy, can be. Because commercial properties are more expensive, having a plan is even more necessary.
Your mentor can help you create your plan. Not only that, they can help you recognize potential problems so you can create Plan B, and perhaps a Plan C, D, and E.
If you don’t have a plan that accounts for potential issues, then you expose yourself to unnecessary risk. Your mentor can help you develop parameters and answer questions such as:
- What is my exit strategy? What will I do if that exit strategy doesn’t work?
- How much can I pay for the property and still get my desired returns?
- Where can I find the right loans? How many loans should I examine before choosing one?
- How can I find tenants for this property?
- Is the property management company in place the one I should use?
- Are there any value-add scenarios in this property? Am I capable of getting this property to its best and highest use?
- And more
Your mentor will help you create a detailed plan that provides solutions to bumps in the road. If done correctly, you will never be blindsided with an issue that you don’t already have an answer to.
In today’s real estate market, commercial property is a wise choice. However, investing in these properties take specific knowledge that is difficult to obtain quickly. That is why you having a mentor is key to your success.
