Commercial Real Estate Basics for Investors Entering the California Market In 2019

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Novice and seasoned real estate investors alike are constantly making efforts to diversify their portfolio. After all, for many, a diverse portfolio directly translates into multiple revenue streams, and we all know that it isn’t too wise to put all our eggs in one basket.

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With that said, however, it’s unfortunate that most investors in the country are afraid of treading into the realm of commercial real estate fearing the worst. While that’s understandable because commercial real estate can be a lot more challenging and intimidating than residential real estate, it still isn’t a good enough excuse to put investment opportunities in commercial real estate completely off limits.

And since we know that most of your fear stems from not knowing how to go about investing in the commercial real estate market of California, we’re letting you in on commercial real estate basics that can help you make informed investment decisions.

So, without further ado, let’s dive right into the basics of commercial real estate that investors entering the California market in 2019 should be aware of.

Getting Started

Making the decision to start investing in commercial real estate can be a difficult one, but we promise you that it’ll all be worth it if you’re ready to put in the required amount of effort and exercise due diligence.

When it comes to commercial real estate, the first – and most important – thing that you must do is understand the market that you’re working in. After all, you can’t really sell office buildings if you’re not sure how the area actually works.

As an investor, it’s also important for you to understand that California’s commercial real estate market has been strong for some time now. While that’s good news, it also means that more people will start showing interest in the market.

This, by extension, means that there will be more competition.

Before closing your first deal, it is, therefore, crucial for you to conduct proper research to ensure that you are aware of selling points and have the competitive edge.

Know How Much Risk You’re Willing to Take

One of the most common mistakes that real estate investors make is not spending enough time understanding how much risk can actually be involved in making investments. Since they are ecstatic about closing their first deal – or five – commercial real estate investors often tend to dive right into making investments thinking that they will figure out the details along the way.

While it’s true that you can’t be certain about a lot when it comes to investing in real estate, it’s important to note that the Californian commercial real estate market can be absolutely horrifying if you’re unprepared. Top that off with the innate risk that comes with every real estate investment, and you might just end up losing millions of dollars in investment just because you didn’t take out the time to figure out where you’ll draw the line.

To give you more insight about just how much real estate prices can vary, rental prices in some Californian cities in February 2019 were recorded to be more than twice as much as the rental prices in Pittsburgh, Pennsylvania.

Understand how Commercial Leasing Works

Commercial leasing can be different from residential leasing in a number of ways which is why it is essential for you to understand just how the two differ before you start working as a commercial real estate investor.

Before you make your first investment, it is important for you to know how some basic parameters for your commercial real estate property can be set. These parameters include the target audience, property type, size, and budget.

Now, let’s take the example of a mid-scale motel. Since the motel will primarily be targeting passengers in transit, it is a good idea to lease a commercial space that’s near an exit of, say, the Santa Monica Freeway.

On the flipside, this may not be a requirement for an office building.

When it comes to the size of the commercial property, you’ll have to factor in just how many people will the property is expected to accommodate. As a quick guide, when you are trying to lease space for an office, it is important to keep a figure of between 100 and 150 square feet of usable space per employee. What this means is that once you have a good understanding of the maximum workforce that you’ll be willing to accommodate, it’s important to multiply that number by 100 or 150 to understand the square footage of the commercial real estate property that you will need.

For the budget aspect of the commercial real estate property, you must keep common area maintenance fees (CAM) and other utility fees in mind before making estimates.

Once all of this is done, you must understand how full-service leases, net-leases, and modified-gross leases differ, and that you cannot really figure out which lease type is ideal unless you weigh out the pros and cons.

For a quick glance, full-service leases are all-inclusive and generally cost more than all other lease types. This means that they do cover everything, and you will not be expected to pay any extra amount. Net-leases might have a lower value than full-service leases but landlords can add other fees for utilities and insurance. The last type of leases, modified-gross leases are the perfect balance between the two types of leases that were mentioned earlier.

Seek Professional Help

It’s common for novice commercial real estate investors to believe that they are capable of making complicated investment decisions without external help. While this confidence and courage is commendable, it doesn’t exactly give the results that one needs.

Needless to say, when investors who are new to commercial real estate investing start taking too many decisions without seeking professional advice beforehand, the resulting scenario is – more often than not – detrimental. It is, therefore, recommended that you consult with a professional commercial real estate investor in the Californian market like AJ Rana at Lemara Commercial when you are starting off with your commercial real estate investments to ensure that you don’t end up making decisions that will cost you more than they should.

In addition to consulting experienced and established real estate agents, it is also recommended to communicate with tax consultants to find out everything you need to know about how taxation works for commercial real estate. By building a network with the right types of people in California, you will increase your likelihood of building a lucrative career as a commercial real estate investor.

Now that you know all that you must do to enter the commercial real estate market of California as an investor, we recommend that you start conducting research and be well on your way to building a successful career.

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