If there was ever a “tried and true” investment, it would have to be real estate. Well, millionaires still agree that real estate is the best investment of the time for its consistency and reliability. Now, if you’re thinking about buying real estate for the first time, there’s a lot you need to know for your best chance of success. Let’s talk about how to start commercial real estate investing successfully!
What Is Commercial Real Estate?
Briefly, let’s discuss the difference between commercial property and a multi-unit home. While different states and municipalities may have different guidelines, a multi-unit home typically consists of no more than four units. After that, it will generally be considered commercial property, which will be taxed differently.
The Benefits of Investing in Commercial Real Estate
Before we discuss how to get started, let’s first talk about why real estate is such a popular investment. Here are some of the key benefits of investing in real estate.
Passive income is the income you earn without having to do anything. As a landlord, you’ll earn semi-passive income, as there is still some work that a landlord needs to do, although quite limited.
There may be some months where all you need to do is drive by and pick up your rent checks, while other months may require more hands-on work. On average, landlords in the US work around 4 hours a month per rental property, but this can vary widely.
If you’re filling vacancies, you should expect to work up to 40 hours a month, but significantly less when all of your units are occupied.
Also, it isn’t just the rental income you’ll earn. If you plan to keep the property for a long time, then this can help you secure your retirement. Relying on social security or retirement funds alone is risky, so boosting your income can offer plenty of security.
Not only is diversifying your investment portfolio important, but real estate offers a unique type of diversity. Stocks fluctuate and demand changes for precious metals, but people will always need a place to live.
Even during the most turbulent economic times, if you find a property in the right location, you’re almost certain to find tenants.
Here’s the great thing about real estate investing. We all know that, ideally, you’ll generate monthly income with minimal expenses, especially once the mortgage is paid off.
What’s often neglected is that no matter how much income you earn, you’ll still have the primary asset to liquidate whenever you choose: the property itself. This way, if you ever decide to sell, you can potentially get your entire investment back or even turn a profit, no matter how much you’ve already earned.
How to Get Started With Commercial Real Estate Investing
Now that you understand why real estate is such a popular investment, you’re probably interested in investing yourself. Well, here’s how to get started!
1. Choose a Type of Investment
With commercial real estate, there are two primary types of investments if you plan to buy the property yourself: flipping and renting.
Flipping properties is a great way to earn a short-term lump sum of cash for your work. Essentially, you buy a property that needs some work, you fix it up, and you resell it for a profit.
Turnkey rental properties are where you buy commercial real estate that already has tenants occupying the property. These tend to be more expensive up front, but you can start earning immediately.
However, there is a third option that combines the best of both worlds, and it’s known as the BRRRR method of real estate investing. BRRRR is an acronym for buy, rehab, rent, refinance, repeat.
Essentially, you buy a flippable property, you put in the work, and rent it out yourself. Once you have tenants, you can try a cash-out refinance on your mortgage to give you the money you need to buy your next property. In theory, this is the fastest way to build a real estate portfolio, but only when done correctly.
If that’s not your style, don’t worry. Flipping and renting are also highly profitable, as long as you know what you’re doing.
2. Save for a Down Payment
Real estate is about the only investment you can make that only requires 15% down before enjoying all of the benefits. However, is 15% enough?
If you put 20% down, you may be able to avoid private mortgage insurance, which could save you a lot of money in the long term. Then, you need to factor in other expenses.
You may need to pay for an inspection, realtor fees, and any unexpected expense that comes after purchase. For that reason, we suggest having at least 25% available to you prior to purchasing, but we know that isn’t always feasible.
Either way, set a savings goal, take a look at your personal finances, and draft a budget that can help you save for your down payment on time. Look at commercial properties in your area to get an idea of what to expect.
3. Do Your Diligence
There are a few factors that can make or break your real estate investments, and you only have control over two of the biggest ones before you buy the property. The neighborhood and the building itself are critical to the security of your investment.
Consequently, you’ll need to hire a thorough inspection so you have an idea of how much you’ll need to invest into renovations, how well the structure is performing, and more. If you spend all of your money on a down payment only to find out you need $20,000 worth of repairs two months later, this could tank your investment.
From there, you will need to find the right location. There are certain landmarks you can’t rely on, especially businesses like restaurants or stores. They come and go.
However, properties located near downtown areas, busy public transportation stops, schools, and significant (and permanent) landmarks will help secure your investment. Remember, if the neighborhood goes downhill, so does your investment.
It’s best to wait for a property that you feel comfortable buying than to rush into something you’re unsure about. Waiting a little longer will also give you more time to save for emergencies.
4. Find the Right Tenants
The third factor that can harm your investment is the tenants. One bad tenant can cause a lot of damage to your investment by physically damaging a unit or common area, refusing to pay rent, driving out other tenants, or more.
Especially with eviction moratoriums in place, it’s more important than ever to find tenants that are capable of paying rent each month and that have the history to back it up.
For this reason, developing a proper tenant screening routine is essential for the success of your business. This includes credit checks, criminal background checks, and rental history checks. You want to find the best people for each unit.
5. Draft the Right Lease Agreement
While some of these factors will be entirely new concepts to an aspiring landlord, don’t let them overwhelm you. Drafting a lease agreement may sound challenging, but it doesn’t have to be.
Every city will have attorneys available to help you draft a lease agreement, and they aren’t as expensive as you may think. Once you have it, you’ll have it for future tenants and you’ll only need to update it periodically. Just make sure your lease agreement reflects your vision of the property.
6. Be Communicative and Prepared
A proper tenant-landlord relationship involves healthy communication both ways. If you have an issue with a tenant’s behavior, address it sooner rather than later. Remember, you want them to reciprocate that same courtesy.
For example, if a tenant doesn’t have the chance to talk to you but they noticed a small leak coming from their ceiling, that lack of communication could cost you thousands for something that may have only required tightening a bolt.
Also, try your best to always be proactive with maintenance, maintain an open line of communication with tenants, and do your diligence. These small habits will save you a small fortune throughout your time as a landlord.
7. Maximize Your Income
Set your rent prices relative to the current market in your town or city and raise them when necessary. Real estate is a great way to protect yourself from inflation and other concerns, so adjust accordingly.
However, that’s not the only way to earn money as a landlord. Coin-op laundry, convenience fees for online rent payments, and more can help you generate more revenue, which is especially helpful while you pay off the mortgage!
8. Always Have Savings
Any wise business owner knows to have money on hand to plan for the worst. As a real estate business owner, you’ll need to do the same.
The average homeowner in the US should expect to pay $3,600 a year on maintenance and repairs, so you can expect to pay more for larger properties. Of course, you can factor this into the rent!
Roofs can break, water heaters may need replacing, and pipes may freeze. If that’s the case, you’ll be left with a several thousand-dollar bill. Always try to have cash available in case of emergencies.
9. Consider Property Management
Don’t worry, we’re not trying to sell you any services. However, if the thought of carrying out all of these steps yourself seems overwhelming, then once you have the property, you may consider hiring a property management company.
Property managers typically take 10% or less of your rental income and they do all the work. That includes 3 AM repairs, maintenance, rent collection, tenant screening, and more.
This turns your semi-passive income into entirely passive income, allowing you to move away from the area, take longer vacations, or retire while still earning checks.
Preparing for Taxes as a Landlord
Once you own the property, it’s very important to understand tax laws in your state regarding real estate. For your first year as a landlord, here’s how to start preparing for your tax bill.
In all seriousness, tracking your business expenses and revenue is an essential habit to develop early on. We mentioned always saving for unexpected expenses, but taxes are an annual expense you’ll need to prepare for.
Any income you generate from rent, or other revenue streams we mentioned, needs to be monitored. You will have to mark these as income at tax time.
Also, any money you’ve spent on maintenance, repairs, marketing, or anything else can be deducted as a business expense. Start saving your receipts or developing a system to track these expenses.
Once you’ve tracked these, you can use an income tax calculator to project how much you’ll owe in the coming year.
Calculate Property Taxes
Remember, income taxes are only one part of your tax bill. You will also owe property taxes, which stay fairly consistent throughout the years, but not entirely. Generally speaking, you can expect a gradual increase each year.
Fortunately, this is public record, so you can see what your property owed in previous years and prepare for a slightly larger tax bill. Also, income from a commercial property will be taxed at a higher rate than a two-unit home.
Capital Gains Taxes
If you flip the property or sell it at any point in the future, you will need to pay capital gains taxes on any profits you’ve made. Don’t worry, you’ll only have to think about this after you resell.
Start Earning Today
Essentially, you can make the most of your real estate investment if you develop the habit of thinking ahead before it’s too late. Before making any decisions with your investment, including buying a property, accepting a new tenant, or anything else, ask yourself if you’ve thought through the risks.
Now that you know how to get started with commercial real estate investing, why wait? The sooner you get started, the sooner you can start earning.
Start investing today and keep reading our blog for the latest information on taxes and personal finance!