Commercial real estate (CRE) investing involves a diverse collection of properties including retail, hotels and resorts, land development, residential apartments, industrial parks and more. CRE is lucrative for investors, and if you’re just starting out in this line of real estate, you should take into consideration economic cycles and property analysis prior to entering into your next deal.
Understanding economic cycles is key for a successful investor. The four typical economic stages—expansion, contraction, recession and recovery—all offer different opportunities to the savvy investor.
The bottom phase includes the recession and recovery stages. The recession stage is the best time to buy, but can also be the scariest, since typically, inflation and unemployment are high and demand for rentals decreases. With all of those risk factors considered, this is also when the property will probably be the cheapest. When the economy enters into the recovery phase, vacancies decrease and rental rates start to increase. When these signs begin to appear, you know you have weathered the storm.
The peak phase includes the expansion and contraction stages. Key indicators of the contraction stage include an increase in new projects, rising inflation, and increasing interest rates. Some markets will see increased vacancy rates and a leveling off of prices. Understanding these indicators will help you know how to take advantage of market timing to make the wisest investments. Everyone wants to experience the expansion stage when population increases, incomes rise and employment is high. The peak phase may be an ideal time to sell your property and cash in on your investment.
With these two phases, bottom and peak, come uncertainty. Having a plan and watching trends in any type of real estate is critical to getting the best bang for your investment buck. Continued analysis of the area and type of commercial real estate investments you have and are interested in will be key to your success.
Property analysis is another key to achieving your real estate goals. There are several types of analysis to consider, including operating expenses, taxes and break-even.
Operating expenses: It is important to identify all expenses that relate to operating the property. These expenses will sometimes be presented to you by a broker, however our recommendation is to review them with your property manager. Brokers are trying to close a deal, but property managers actually deal with property maintenance, be it routine or unpredictable. Property managers will have a better idea if the proposed operating expenses are truly in line with the experiences they have on similar properties.
Taxes: When brokering a new deal, check the taxes with the tax assessor’s office. Taxes listed on the realtor’s or broker’s sheet may be current, however when a property is sold it is common for it to be reassessed. Upon the sale, there may be an increase in property taxes.
Break-even: Understanding your break-even analysis on a CRE property is important to ensure there are enough tenants to cover at least your expenses. No investor wants a negative cash flow position, and while being cash-neutral is a better position than negative, being neutral can still negatively impact profitability.
Our recommendation is to discuss each form of property analysis with your lender. Having open and transparent communication will help your deal move more quickly and smoothly, and your lender will be in a better position to help if there are bumps along the way.
If you have questions regarding potential real estate deals, register for the Anchor Loans Borrower’s Portal to open up a discussion. Anchor has partnered with thousands of investors to provide financing for single family, multi-unit, condo, land and commercial units.