Commercial real estate has long been a mainstay of the American economy: many companies rent their buildings, and only about two-thirds of residents own their house. Property is a secure long-term investment and typically appreciates faster than other assets, such as stocks and bonds.
However, the value of real estate does not preclude challenging times: mortgage rates for residential homes are currently standing at an eye-watering 7.19% interest rate, which is mirrored by rises in commercial real estate loan rates as well. This leads to a shortage of available properties and fierce competition, even in lowkey markets.
As such, it’s important for commercial real estate investors to consider how they can stay on top of the game through creative solutions that will protect their investments and help them solidify their portfolios. Today, we’ll discuss how you can boost your chances of success, regardless of current market conditions.
Leverage DSCR Loans
Conventional loans were simply not made for the commercial real estate space, and they often have complicated processes that make it difficult to expand your portfolio in a timely manner. The lengthy investigation into your personal finances and high standards for approval lead to serious delays, which can prevent you from jumping into a hot market at the perfect time.
In contrast, DSCR loans have a fast and straightforward approval process, and you can roll numerous properties into the same loan to ensure that you can target up-and-coming neighborhoods that aren’t yet on other investors’ radar.
DSCR loans use a ratio that divides the property’s income by its debt service to identify its productivity. A ratio above 1 means that it is generating income, while one below 1 means you’re losing money. You can identify this for yourself before applying for a loan by checking out a Debt-Service Coverage Ratio (DSCR) calculator, which will also help you choose properties with great promise.
Spread Out Across a Region
Every town is different, and moving even one municipality over can completely change the market conditions. Things like major employers, crime rates, school district ratings, and weather patterns all influence how each city or village handles market conditions; change one variable, and suddenly housing prices skyrocket or plummet.
Like with all investments, it’s good to have an even spread, including a mix of different property types and areas that you cover. This means that should one town have a major industry fail, you’ll be able to continue covering the mortgage with the windfall from another area.
One of the best things you can do as a real estate investor is find a good property management company to work with and then identify their service area. You can then stick within these confines, buying different property types and in different areas to hedge your bets regarding market conditions.
You may also be able to negotiate a discount based on the volume of properties they manage for you, which can help reduce per-capita costs and make it more profitable to hold on to your investments.
Infiltrate Untapped Markets
In difficult economic times, competition grows fierce for the largest markets. While they are typically considered a safe bet, this can also make it hard for younger investors to break in, creating miniature monopolies among larger and more well-established real estate investment firms.
This is why you may consider looking outside of major cities to find where people are moving, then begin snapping up real estate here to boost the local economy. Remote work has made it more feasible for people to live outside of metropolises; accordingly, they are heading to smaller towns and invigorating the markets in these regions.
Take a good look at population trends as you decide whether to break into the market; for example, you might be surprised to learn that some of the most popular places to move are smaller marketplaces like the Carolinas, Maine, and Idaho. Purchasing or building properties near the larger cities in these states can help you take advantage of this influx and build a resilient portfolio with less upfront cost.
Negotiate and Provide Perks
The past few years have been difficult for industries of all sizes, but particularly for small businesses, which have a lower profit margin and greater risk. The higher cost of living has also hit the residential rental industry, particularly with the large push toward short-term rentals.
As such, consider the fact that having a slightly lower income is better than none at all: evicting tenants is a time-consuming process, and it also leaves you with an empty property that you aren’t guaranteed to fill. Be willing to negotiate with your tenants, whether that is by waiving pet fees or allowing more flexible lease terms, in order to maintain tenancy and prevent expensive vacancies.
Though the market is difficult, this doesn’t mean that commercial real estate isn’t a good investment: conditions are almost certain to improve. Creativity and resiliency can help you hold onto your properties and expand your portfolio, leaving you with an excellent windfall once loan rates fall and the market kicks into high gear again.
Featured image provided by David McBee; Pexels; Thanks!
