Commercial real estate is incredibly lucrative over the long term, but this isn’t always true for everyone. Much of your luck comes down to market fluctuations, the size of your portfolio, and the specific properties you select to generate income.
As with any form of investing, the more extensive and more varied your holdings, the more likely you are to develop a healthy profit; this is even more so in real estate because a wide variety of factors, both marketwide and individual, determine your success. These are four of the best ways to diversify your holdings and protect your business from market shocks.
Think about other property types
You may have started out becoming a landlord for a single-family home, then realized that you could build on your success by purchasing more properties. Residential rentals are incredibly popular because high home values have priced many out of the housing market, but other forms of commercial real estate can be equally profitable.
Depending on where you’re operating, you may consider vacation rentals, office spaces, retail stores, hotels, restaurants, or even factories. Study the market and identify which of these options may do well in your area; this includes zoning laws, as some areas may not even allow certain types of properties like factories.
Focus on building use
This is more focused on retail commercial real estate, which is an incredibly diverse specialty. Everything from small clothing boutiques to malls falls under this category, and each building will have a unique use. Remember that for commercial real estate, the success of your investment also depends on the success of the businesses that utilize your property; if they’re doing poorly, they may fall behind on their rent, thus imperiling your ability to cover your debts and make a profit.
This is why when you buy retail spaces, you need to look for particular tenants that would need this type of building, which means you need to look at market trends for that niche too. Some properties are relatively flexible: you can put a yoga studio, a store, or a cafe in the same location. However, others are more specialty, such as restaurant spaces or gyms.
Consider all the potential uses of your space, whether it is very particular or more general, and then investigate market saturation and trends for these business areas. You can then decide whether a property would fit well in a given area and if it can be expected to find plenty of tenants.
Explore different markets
Each area of the United States has different economic projections: some are riding a high, while others are slowly becoming depopulated and losing economic power. To ensure that your own portfolio is protected if your current market experiences a downturn, look beyond the borders of your municipality, region, or state. You might decide to have properties in an area with proven staying power, then a few in promising areas that may become major players in the next few years.
While managing geographically distant properties can be a logistical challenge, having a good team will help you stay on top of everything. Work with property management companies who can be your eyes and ears on the ground, as they will assist you in the day-to-day functions so that you don’t need to constantly check up on your properties.
Leverage loans that allow for faster expansion
Funding is crucial for every business: you simply can’t grow if you don’t have capital. When it comes to commercial real estate, the money to finance your projects generally comes from mortgages, which are then paid off with the earnings from your properties. However, not every loan product works well for real estate investment especially because conventional mortgages generally have a hard limit of ten properties that can be rolled into one loan.
While this may work fine for some small-time developers, it can be a serious pinch point for those who want to expand more. This is why so many commercial real estate investors rely on Debt Service Coverage Ratio (DSCR) loans, which have more flexible property limits.
For example, Visio Lending offers DSCR loans Hawaii investors can use for as many properties in the state as can generate a profit relative to the mortgage size, because the income-generation potential is the most crucial component of being approved. This allows you to build quickly as long as the combined Debt Service Coverage Ratio is high enough: this typically means that all your properties together should make at least 1.25 times the cost of the debt service.
Final words
Diversification is important in every investment field, but this is especially true with commercial real estate purchases, which comprise such a large percentage of the American economy. Spread your portfolio across property types, uses, and regions, and rely on loan options that allow you to expand quickly to ensure greater chances of success.
