4. Establish realistic return-on-investment goals
Before buying your first property, learn the definitions of capitalization rate, internal rate of return, cash-on-cash return, and net operating income. Set reasonable targets for these metrics based on your market and asset class and try not to stray from them.
These targets should be fairly accurate and achievable if you’ve researched rents, prices, and operating expenses in your target areas.
If a property doesn’t meet your targets, you may want to take a pass so you can jump on one that does when the opportunity arises. Knowing your numbers and performing due diligence helps you make the best use of your available investment dollars. That's one of the keys to achieving the goals and objectives you laid out at the beginning of the process.
5. Develop a growth strategy
How will you grow your commercial real estate investment business? Will you start with one property that you can continue to trade up in 1031 exchanges? Or will you use the cash flow from the first property for other investment opportunities, acquiring more as you go along?
Having an idea of how you'll grow can help guide your purchase and sale decisions. Let's say you buy a property that costs $100,000 and earns you $500 per month. Ten years later, it has appreciated to $200,000. You want to manage fewer properties but increase your income, so you sell the property and use your $100,000 profit to purchase a $300,000 property that earns $1,000 per month. Ten years later, it’s worth $400,000, and you have $200,000 in equity. The area has appreciated so rapidly that you can’t buy anything outright with your $200,000, so you plunk it down on a $600,000 property that earns $2,000 per month.
Continuing with a growth strategy like this helps you make big gains in real estate.
6. Make a plan for networking
Having a networking plan is key to growing your real estate investment business. Start meeting and talking to other investors sooner rather than later. You can learn from them and share resources and opportunities. Many commercial real estate investment deals are between people who know and trust each other.
You’ll want to network with other professionals so you can engage a good accountant, a couple of private and bank lenders, real estate attorneys, and commercial sales brokers before you need them. That way, when an opportunity arises, you can get things done quickly.
Let’s say an investor friend comes to you with a proposal to form a partnership to purchase a six-unit apartment building. He’s got it under contract already with an agreement to close in 60 days. You’ll want to have a lawyer you trust at the ready to review your partnership agreement and possibly a lender so you can close in time while still protecting your own interests.
7. Create a sub-business plan for each property
Whenever you plan to make a new acquisition, do a mini business plan for it and address all the above points. How will this property help and complement your overall business?
What are the pros and cons of its location? Does it meet your target for return on investment? Do you have the bandwidth to take it on right now? Do you need to take on partners to make the deal work?
Doing this has two benefits. First, you set a clear roadmap that can guide your decisions about this property. Second, you can use that plan to approach lenders and partners with a clear understanding of the property’s value proposition and how it fits into your plan.
Take the time to plan in advance
When starting any new endeavor, it’s best to plan twice and execute once. While you’re going to be learning and growing as you acquire, manage, and optimize each new property, you’re also likely to experience a few headaches and challenges.
These will be better mitigated and remedied if you have a plan to refer back to. And it'll remind you of why you’re in the commercial real estate investing business in the first place.