6 key questions you should always ask yourself before investing in commercial real estate

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Commercial real estate is one of the most trusted investment opportunities.

Many people create long-term wealth through their real estate investments. Cyrus McCormick, one of the richest Chicagoans in history, made his fortune early by inventing a useful tool, but he increased his wealth to massive proportions by buying properties in Chicago and waiting for the city to build around him. He brought his fortune to $ 215.9 million today.

McCormick is one of the earliest examples of the wealth creation model that many of the world’s richest people follow today. One commercial real estate investment finances the next, and wealth quickly snowballs into fortune.

Although it is reliable, there are a lot of things you need to know to get the best possible return on your investment. Before going ahead with your latest investment, be sure to do your research and ask yourself the important questions.

1. Are you looking for cash flow or appreciation?

Commercial real estate investors generally hope to make a profit in two ways. Investors get their money back either through cash flow or appreciation. In some cases, investments with the highest return on investment can create value through both appreciation and cash flow.

It’s important to know whether you plan to get a solid ROI through cash flow or appreciation. This distinction affects the type of properties you choose. There are advantages and disadvantages to each type of investment.

The cash investment brings regular rental income. If you are using a loan to make a cash investment, you will need to find a property that generates rental income that is greater than your monthly payment and possible maintenance costs.

This will require researching local market rental rates and a thorough understanding of the condition of your property. Cash investments are convenient, but they take more work to find. This usually means looking for a low cost property that also generates a high monthly rent.

If you are able to expect a return on your investment, there is less need for positive cash flow. With a little patience, you will get your money back as the value of the property appreciates. It takes longer and carries a bit more risk, but it allows for more flexibility.

Related: The best kept secret in real estate: this little-known flaw will change the way you invest

2. Do you need cash in your investments?

Real estate is one of the less liquid types of investments. This means that it is difficult to exit the investment if you realize that you want to get back the money you have invested. While it is possible to exit a real estate investment prematurely, it is not always easy and can result in a loss on the investment.

If you are concerned that your money will be tied up for years to come, you may want to consider more liquid investments than commercial real estate. Investing in stocks is generally a much more liquid investment.

3. What is your tolerance for risk?

While commercial real estate investing is reliable, it does come with certain risks. It is important to know your tolerance for risk before making an investment. If the market goes down for a while, will you be able to stay afloat financially while waiting for the market to recover?

If you would not be able to support yourself in a market downturn, you should consider low risk investments. Look for low cost properties in reliable locations. However, if you are able to manage certain risks, you can see higher returns.

Related: 5 mistakes franchisees make when looking for commercial real estate

4. What are the market trends?

Understanding the market trends is the most important part of being a successful investor. While you can look at global trends, it’s also essential to look at trends in your specific area.

The commercial real estate company CBRE carried out market research and found that the commercial real estate market is on the rise. According to its analysis, the multi-family investment volume is expected to reach $ 191 billion next year, a gain of 33% over last year’s volume.

The type of area you invest in will have a significant impact. Be sure to research global and local trends before making your final investment decision. You will get much higher returns if you take the time to be a sophisticated investor.

5. What industries will you enter?

There are many industries that you can target in commercial real estate. Are you hoping to own retail space, doctor’s offices, hotels, or mixed-use space? Each industry has its own needs and market trends.

This year, data centers and storage space facilities have been hot markets for commercial real estate investors over the past year. Real estate investment trusts have delivered returns greater than 20 percent for data centers in 2020. Investment in self-storage properties has had similar returns and is also expected to increase significantly in the years to come. The annual growth rate is expected to be a huge 134.79 percent until 2025.

Look for areas with high yields and high growth rates when choosing the type of commercial property you want to invest in. Not all investments are created equal, so do your research before you go ahead.

Related: Should you take out a commercial real estate loan? How to decide.

6. How will zoning by-laws affect you?

Investing in real estate requires knowledge of the regulations in your area. Zoning regulations can impact your investment because they can determine how you can use your property.

If you are hoping to own a mixed-use space that combines commercial and residential spaces, you will need to know if the zoning allows it. After reviewing the zoning regulations in the area you want to invest in, you will have a better idea of ​​how you can use the space and how it will affect your finances.

Still anxious to make your first (or fiftieth) commercial real estate investment? The nerves probably aren’t going to go away anytime soon, but armed with the six questions above, you can at least take comfort in knowing that you are making the type of inquiries that will help you make smart and informed investment decisions.

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