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6 Steps To Start Building A Commercial Real Estate Portfolio

By Jamie Richardson | March 17, 2021

Investing in real estate offers a variety of options; you can buy real estate-related stocks, rent out properties, partake in crowdfunded deals, or flip houses. However, one option that's always going to remain popular is commercial real estate (CRE). 

While generally high in risk, CRE also results in high reward and includes a vast range of property types that you might not have even known about. You might be confused about what CRE includes and, simply put, it concerns any property designed to make money, such as industrial warehouses, retail stores, office buildings, and even hotels, storage spaces, and casinos. Another thing you should consider is the location of the properties you're looking to acquire. Buying commercial real estate for sale in Staten Island, NY can be a great strategy since they're situated in a prime location.

Suppose you want to expand your investment portfolio. In that case, commercial real estate is an excellent place to start due to its high-income potential, tax benefits, relatively less competition, and less turnover, among other things. Here's how you can start building your portfolio:

Clarify your goals and investment strategy

The entire point of putting effort into a real estate portfolio is to fulfill your financial goals, which is why you need to be sure of what you're trying to achieve, whether it's more financial freedom or a steady stream of income. 

This direction is entirely up to you and will dictate your investment strategy. You can consider multiple strategies, such as a fix and flip strategy, a buy and hold strategy, or even purchasing a property and renting it out for profit. Texas commercial real estate CEO Al Hartman focuses on value-add strategies. He said, "We have become very adept at buying properties that have some form of distress and low occupancy... Then, after we buy it, we put our team on it to turn it around and begin leasing."

Additionally, if you're looking for some passive income, you can consider REIT, which is similar to how you'll invest in stocks. It's a good idea to select an investment strategy and follow it. If you want to diversify, you can consider that later.

Create an investment business plan

Once you have your strategy in order, it's time to create a plan. This will initially seem like a tedious process, but it's time and effort that'll be worth it later on. It'll help you sort out your short-term goals and bring you closer to your long-term objectives. 

Apart from this, the business plan also comes in handy if you're intending on getting partners on board. When you put effort into a plan before your first investment opportunity, it helps convince potential partners that you're serious about this. 

Time to buy your first property

Now, this is the moment you've been waiting for; investing in your first commercial real estate property. It's crucial to have experts, such as a real estate agent, on board to make the right decision. It's also incredibly crucial to figure out what your financing options are. You can consider loans such as conventional bank loans, hard money loans, and joint venture loans. 

An excellent option to keep in mind are mezzanine loans which combine debt and equity and provide you with immediate liquidity, thereby helping you avoid prepayment penalties. When you've found a property that's caught your eye, the key is to perform an investment property analysis that helps you determine whether your decision is financially viable or not. 

Accumulate more properties 

As time passes, it's critical to invest in more properties and grow your portfolio. However, this isn't an easy task since monitoring and managing different properties can quickly become a challenge. It's critical to ensure you're always on top of your portfolio and keep it organized. 

Luckily, there are many ways you can organize your portfolio and simplify the task of managing it. A real estate investment spreadsheet can help you keep track of your income and expenses regularly and gauge your investments' profitability. Additionally, you can also look into apps that can also help you manage all your other investments. 

Look into diversifying your portfolio

There will come a time when you'll have to diversify your portfolio. Fundamentally, a diversified portfolio helps you spread the risk of your investments and there are a number of ways you can do this, including:

  • Diversifying the asset class: If you've been focusing on a specific rental property, you can expand into other commercial spaces or apartment buildings. It would help if you also considered renting out retail or office spaces.
  • Diversifying the investment strategy: If you've primarily invested in properties, look into real estate mutual funds, real estate ETF, or REITs.
  • Diversifying the real estate market: If you've limited yourself to a particular neighborhood, you can spread the risk by exploring other markets and considering long-distance investing.

Measure the success of your portfolio

Over time, you'll need to determine how you're doing by measuring the success of your portfolio. While you can consider the straightforward approach and hire a portfolio manager, you can also look into the DIY approach and calculate a number of metrics yourself. These are:

  • Net cash flow: The yearly difference between your property's income and expenses. It accounts for expenses, such as utilities or unit maintenance, as well as debt service payments.
  • Economic vacancy rate: Helps determine whether you should raise your rent. You can also compare it to the average vacancy rates for other properties in the area.
  • Cash-on-cash return: Divide your cash flow by the initial investment to determine how your investment is doing in real time. You can compare this metric to other properties in the area to determine how your income is doing.

Final Thoughts

Once you get the hang of it, you'd be surprised how commercial real estate can boost your investment strategy. While it isn't an easy task, it leads to significant rewards. By following the steps above, you can get a kickstart on building your commercial real estate portfolio and start building a steady stream of income from these smart investments.

Jamie is a 5-year freelance writer who enjoys real estate. He is currently a Realty Biz News Contributor.
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