2. Know the market area and supply and demand
Every market is different, and when you invest, you are investing in a specific geographic area that has its own unique supply and demand. Certain property types may be doing well on a macro level, but there could be an oversupply in your city, or vice versa.
A good place to start is researching the market supply in your immediate area, taking into account both the current rentable square footage and any additional square footage from current construction and planned developments.
If you have identified a property type that is undersupplied in your specific market, you can get a feasibility study to outline the future growth and likelihood of success in that sector. CBRE (CBRE -0.21%), CoStar Group (CSGP -0.47%), Deloitte, and Realtor.com are great resources for this data.
3. Understand market cycles
The health of the economy, unemployment rate, and gross domestic product (GDP) all directly correlate to the profitability of commercial real estate. Understanding how real estate market cycles work can help you avoid buying high and selling low.
Additionally, knowing the specific indicators of the various market cycles will help you identify current opportunities and make more informed investment decisions.
4. Do thorough due diligence
The due diligence period is when a prospective buyer can conduct thorough research on the investment opportunity. This can include reviewing financials, documents, tax returns, and profit-and-loss statements from the previous owner, as well as conducting surveys, property inspections, a feasibility study, and any other necessary research.
Creating a thorough due diligence checklist for your CRE property type will help ensure no item goes unaddressed. Here are some common items to consider:
- If you plan to develop vacant property, confirm that the zoning allows you to use it as intended.
- If you want to expand an existing building or build new construction, see how many additional units a market can support.
- Become familiar with the permitting procedures and costs for the city or municipality where the property is located.
If you are investing in more passive forms of commercial real estate, such as real estate investment trusts (REITs), crowdfunding, partnerships, or private funds, your due diligence will include thoroughly vetting the company or individual handling your investment.
Unfortunately, not everyone in the investment world follows the same set of standards. Due diligence on the person, fund manager, or company you are investing with is equally as important as due diligence on the asset.
- Speak with other participants who have invested in past properties or ask for referrals.
- Look at past offerings and actual returns on closed investments to gauge their track record.
- Ask what their due diligence process is like. See how they vet each investment opportunity or determine which REIT or investment to invest in.
- While it may not be necessary with a large-scale investment firm, if it's your first time working with someone in the private sector, do a background check. While this may sound severe, it's common in larger CRE deals.
