Much has been written for newbie investors wanting to get into commercial real estate, but the intricacies of expansion are shrouded in mystery. Buying your first property is exciting, but once you’ve found your footing, you might find yourself seeking more opportunities – and not quite sure how to achieve them.
While no one guide can tell you everything you need to know about when and how to expand your business, as every investor’s personal situation is different, some key considerations are nearly universal for all those looking to make a steady profit from renting and leasing.
Don’t Expand Too Fast
It’s easy to get intoxicated by the excitement of buying a new property, making you feel you can take on the world and become a real estate mogul. While commercial real estate is a form of investment, it’s far more hands-on than things like stock trading or crypto assets if you will be a landlord: there’s more than just signing paperwork and watching your ROI. Renovations, finding tenants, and overall maintenance are crucial costs, and they take both time and energy away from your original property.
Think of it a bit like a corporation opening a new franchise, as this is true; you are adding a new location to your profile, with all of its attendant costs and considerations.
Only when you feel like you better understand the business and have healthy savings from your initial investment is it time to look into a new addition to your portfolio.
Look Into New Loan Options
When you bought your first property, you likely used a conventional loan or a Small Business Administration loan to do so, but these aren’t necessarily the most advantageous for commercial real estate. There’s a lengthy paperwork process and a close eye on your finances, making it hard to be approved. While this isn’t a problem for those working in other industries, such as a bakery, mortgage rates fluctuate rapidly, and waiting a long time may make you miss on out on the lowest interest you can find.
Specially formulated products that are meant solely for real estate investors are offered to those who have proven their ability to manage the costs of a business; this includes Debt Service Coverage Ratio (DSCR) loans, which rely on the income-producing potential of the property rather than your own financial profile. These are more beneficial for real estate investors because they require far less investigation into your own debt-to-income ratio; you typically only need to provide your credit score, with the rest of the documentation being used to calculate how much profit the building will generate.
With these, you’ll need to shop around to find the best lender for your particular service area. For example, if you want a DSCR loan in Tennessee, find a company that is highly familiar with the market and is legally allowed to work in the area.
Consider Hiring New Team Members
Many people believe that real estate investors work alone, which may be true for those buying REITs or shares of properties, but those buying physical buildings and renting them typically require more support.
Once you have more than a few locations, the workload can be incredibly heavy: investigating the market, filing and maintaining paperwork, liaising with property managers, wooing tenants, and managing taxes can get very complicated, very fast. This is why, once you have multiple properties, you should consider hiring a few team members to ensure that all your properties are well cared for and you know right when to strike for your next opportunity. A secretary, at the very least, can be invaluable for a busy real estate developer who is always looking for more real estate.
Don’t Rely Only on Real Estate
Real estate is an incredibly worthy investment, but the recent pandemic has proved that it isn’t always foolproof. Major economic shocks can lead to a loss of income, especially for office buildings and retail; your tenants may fold or choose to relocate to a cheaper market, leaving you with an empty building that you’re not sure how to fill.
Real estate investors should have a great retinue of locations but also need to recession-proof their portfolio through diversification. Buy bonds and CDs you can use later, invest in other sectors, and monitor futures to ensure you’ll always be taken care of. You should devote a portion of your profits to other investments, as this will allow you to buy off should there be any concerns with your primary venture, helping to reduce the potential of default and foreclosure.
Once the rush of your first purchase has worn off, it’s time to think ahead and figure out a solid expansion plan. In addition to finding promising properties, and look to streamline your investment process with specialty mortgage products while leaving some aside to hedge your bets. Above all, be open to learning, and remember that the journey to becoming a star real estate investor requires patience, practice, and passion.