How to invest in commercial real estate Texas
Commercial real estate (CRE) is a profitable investment sector because of its growth potentials, consistent investment returns, and passive income. CRE is becoming increasingly popular with investors as an alternative investment.
If you want to make more profits as a real estate investor, investing in commercial properties yields more income than investing in residential properties.
However, you need to know how to invest in commercial real estate so as to maximize profit and avoid the risks of running into a loss.
CRE has the potentials to be increasingly profitable, most especially if you invest in the right location.
Texas is a very big state in the United States. It has a population of nearly 29 million and the land of about 267,000 square miles. Texas is one of the three states in the United States that contributes 48% of the total population growth in the U.S. Texas has the second-largest economy in the U.S with a GDP of $1.803 trillion in 2018.
Investing in commercial real estate in Texas is a very profitable investment in which real estate investors are sure of making good profits on their investments.
Why invest in Commercial Real Estate in Texas
Texas has one of the lowest unemployment rates in the United States with its unemployment rate at 3.4% in Oct 2019. This makes Texas a desirable location for foreigners who are seeking jobs and better living conditions.
There is no state income tax in Texas which promotes a business-friendly environment. Texas is being ranked as the second top state for business in the U.S.
Investors who are looking to invest in commercial real estate in a state with stable growth rates, better opportunities, and long-term investment growth are advised to look into investing in Texas commercial real estate market.
As a real estate investor, you should invest in Texas commercial real estate because:
- The population of Texas keeps increasing as foreigners and even locals are relocating to Texas due to its high employment rate and good economic condition.
- The economy of Texas is always growing and it is not expected to fall.
- Tax rates for residents and businesses are less in Texas.
- The increase in population and businesses lead to an increase in rentals which benefits commercial real estate owners.
- Commercial real estate properties are always sought after due to the increased number of businesses.
How to get started in commercial real estate
You must first do your homework and thorough research before investing to prevent failure and losses. You must know the ins and outs, dos and don’ts of commercial real estate.
Below are some vital tips you need to follow for a successful commercial real estate investment:
Understand how commercial real estate is different from others
The income from commercial real estate is usually larger resulting from longer leasing periods. A commercial real estate investor has better potentials and opportunities to earn a higher income than a residential real estate investor.
The location of the property and the type of tenant also has a great role to play in determining the demand for the property.
A property located in a location with a low economy and low population will have low demands. This will affect the value of such property. Commercial properties have better value and generate more profits in urban areas compared to residential properties.
Analyze comparable properties
You must first compare the property with other recently sold similar properties before buying and selling a property. This is to help you determine the current market value of the property.
To determine the current value of the property you want to buy, search for a similar property that the square footage is not higher or low than 10% of the property you want to buy. Doing this, you will come up with the most accurate comparable value for the property.
Use the right success metric
You need to understand real estate finance and investing. There are a lot of calculations and formulas involved in real estate finance and investing. These include:
- Net Operating Income – The net operating income equals all revenue and costs from a property. This calculates the amount investors will make from an investment after removing all operational expenses. This is calculated before payment of taxes.
- Cash On Cash – This is a calculation that shows investors the rate of return on a commercial real estate investment. Real estate investors that rely on financing to purchase their properties commonly use this. It measures the returns on out-of-pocket cash or the personal cash invested relative to the return on the part that was financed. It provides an accurate analysis of an investment’s performance.
- Cap Rate – The cap rate or capitalization rate is used to calculate the value of income-producing properties. It is the ration of the net operating income to a property asset value. It provides investors with an estimate of future cash flows or profits from an investment.
Avoid mistakes and mitigate risks
As a commercial real estate investor, it is very important that you avoid making mistakes and mitigate risk. Mitigating risk is the greatest asset of a commercial real estate investor. If you do not know all you need to know to avoid mistakes, you may end up losing and failing.
What are the common mistakes a commercial real estate investor should avoid?
- Financial ignorance – Financial ignorance is failing to understand the financial intricacies of commercial real estate investment. As a commercial real estate investor, you need to learn all the financial components of commercial real estate investments.
- Improper Valuations – As a commercial real estate investor, you need to be able to evaluate and account for variances in each property. If you do not know how to make proper valuations of the properties you want to buy, you may end up going into a great loss.
- Neglecting due diligence – As a real estate investor, you should always mind due diligence. You need to take adequate time to learn much about a property before investing in it.
- Not working with a team – It is wrong for a real estate investor to work alone. Working with a team is essential in order to get the best professional advice and services. Hire a team of qualified professionals who are knowledgeable in commercial real estate investment.