Commercial real estate investments have proven to be a great way to increase your income stream and build wealth. Investing in Sacramento is highly viable and accessible with many opportunities, especially when the investor works with an experienced commercial real estate broker. Commercial real estate investments earn money through income and also through appreciation of the property or land over time. An income-producing commercial real estate property can be lucrative. But it’s important that the investor hire the right commercial real estate broker to find the best type of property.
What makes a good commercial real estate investor?
Knowledge of the Market: It helps if the investor has experience investing in commercial real estate, but it’s not mandatory.
Creative: If the investor can envision a unique opportunity to increase the value of a property, it will be more successful from a commercial perspective. Examples include TI upgrades for hybrid offices or using large unused parking lots at a shopping mall for a new business.
Outside the Box Thinker: Have vision. There is real benefit in the investor seeing value or solutions to problems that aren’t immediately visible to other people.
Have a Need: The investor may want to invest money in a property or land. Or they may be renting now and want to own a property as an investment for their business.
Pre-Approved Funding: It is essential that the investor has funding or the ability to get funding prior to investing.
What does being a creative commercial real estate investor entail?
If the investor can envision a potential solution for a problem, commercial real estate is an industry that allows them to be creative in identifying a variety of opportunities. Taking this into account, say an investor owns a shopping center that has issues and they want to sell it because:
- It doesn’t have a lot of activity due to the location
- It has a 25-30 percent vacancy rate
- It looks empty because the vacancies are spread out and there aren’t a lot of cars in the parking lot
What are some options for the investor that will turn a property that wasn’t viable yesterday into a successful venture tomorrow?
- Relocate the tenants from one side over to the other, which will condense all the tenants into a full section of the shopping center.
- Consider demolishing the vacant section to put in high density, residential townhomes or apartments. Hot Tip: Sacramento is always looking for affordable housing.
- Turn part of the vacant property into self-storage.
- Assess the number of parking spaces and have a conversation with the city. Use this space to add something everyone supports.
- Half-acre of land: add an oil change facility
- Acre of land: add a drive through tenant or a car wash
Do Your Research to Hire the Right Commercial Real Estate Broker
There are a number of methods to find the right commercial real estate broker, but there are two primary ways: a) from referrals and b) Google research.
When looking to invest, ask for referrals in golf, tennis or trivia leagues, community events, on social media, in the office or at networking events. It also helps to ask a respected colleague, who invests in real estate, for a referral. Ask them a few general questions to get the ball rolling:
- Where is your broker located and what is their style?
- What kinds of commercial real estate do they typically work with?
- Do you know other investors who work with them?
- What kind of relationship do you have with your broker?
- If you like the answers, ask for an introduction to the broker.
Looking online is also a great place to start. If the potential investor is doing a Google search to look for the right broker, they should keep these things in mind:
- Look locally in their area (or the area they want to invest in)
- Search for the broker’s ranking in the particular sector they are interested in
- Consider a broker who specializes in the area they want to invest in
- Read reviews on Google or Yelp about that broker
- Research both big broker offices and smaller boutique houses – each one has its own pros and cons.
In addition, the Sacramento Business Journal is a great resource for information on happenings in the commercial real estate market. Talented brokers are frequently mentioned in terms of a project they worked on or helped an investor with.
Interviewing Potential Real Estate Brokers
Once the investor has developed a list of potential brokers, they should reach out and set up a couple of meetings to find out how they mesh with the broker. A good broker understands how important this relationship will be to the investor and welcomes conversations prior to making any commitment. It’s important for both sides to understand what the investor is looking to achieve. The investor is going to spend a lot of time with the broker so they should find someone who compliments their communication style. Winning chemistry between them is one of the keys to success.
Capital Rivers has commercial real estate brokers in Sacramento, Redding and Chico. Each one has a different specialty. And each has a unique background in terms of specialty. For example, Ryan Orn’s background includes 20 years spent in the retail sector as a regional sales director with 12-15 stores and 40 employees under him.
Joe Blanton was a food truck operator before coming to Capital Rivers. He grew his business into a franchise named Krush Burger. Joe is the franchisor and has a franchisee with five Krush Burger locations in the United Emirates in Dubai. This experience gives him a great understanding of the food business because he’s experienced the process of creating franchise documents for his own brand. He’s living proof it’s possible to successfully take a food truck and grow it into a brick and mortar with multiple locations.
A Commercial Real Estate Broker Has Been Hired. Now what?
Once the investor has hired a broker, they will meet to talk through the investor’s journey. The following is generally how the process goes in terms of buying a piece of property or land.
- Meet with Broker
- Create investor profile
- Sign contract with Broker
- Create achievement goals: invest how much with suggested timeline
- Educate the Investor on what’s out there
- Ensure there is a pre-approved funding
- Begin looking for a property
- Target Property
- Broker will pull comps, write a review and create an opinion of value
- The review will place a value on where the broker thinks the investor’s property should be marketed in terms of pricing
- It will include market overview and analysis
- Make an offer
- Broker will create the contract, working with the legal department
- Negotiate contract
- TI need to be done?
- Conversations with the city
- Closing
Things to Avoid as an Investor
It’s important the investor feels comfortable with the broker at the outset. The broker should be accessible night and day and on weekends because issues pop up at all hours, 7 days a week. In closing, the investor should avoid the following when making an investment or choosing a broker:
- Choosing a broker with a lack of knowledge: they didn’t listen to the investor’s wants and needs
- Ignoring red flags: Don’t sign with a broker who doesn’t have strong relationships locally/regionally
- Having unrealistic expectations in terms of timing or financial gains
- Being overly emotional – a broker who isn’t a problem solver
The Benefits of Working with Local Commercial Real Estate Experts
When it comes to investing in commercial real estate, partnering with a local expert can make all the difference.
Local commercial real estate brokers have a deep understanding of the market, the neighborhoods, and the specific challenges and opportunities in the area.
This insider knowledge helps investors find properties that align with their goals while avoiding potential pitfalls that may not be immediately obvious.
One of the key advantages of working with a local expert is their network. Local brokers often have strong relationships with other industry professionals, such as property managers, contractors, and city officials.
This network can be invaluable when it comes to navigating zoning laws, finding off-market properties, or securing the best deals from trusted vendors.
Local brokers are familiar with the latest market trends and can provide guidance on which areas are growing and where future investment opportunities may lie. They know the local demographics, traffic patterns, and economic developments that might affect the long-term profitability of a property.
Working with a local commercial real estate expert allows investors to make informed decisions with confidence, knowing they have a partner who truly understands the market and is invested in their success.
How a Strong Broker-Investor Relationship Drives Success
A solid broker-investor relationship is one of the key ingredients for success in commercial real estate. When both parties are on the same page, the process of finding, purchasing, and managing properties becomes smoother and more efficient.
Good communication is at the heart of this relationship. A skilled broker listens carefully to the investor’s goals, whether they’re looking for steady cash flow, long-term appreciation, or a mix of both. By understanding these objectives, the broker can present properties that align with the investor’s vision, saving time and reducing frustration.
An experienced broker not only offers insights and advice but also helps the investor navigate challenges that may arise, like zoning regulations or financing hurdles. Investors need to feel confident that their broker has their best interests in mind.
When the relationship is strong, the investor can rely on the broker to spot opportunities, negotiate deals, and handle any unexpected issues that come up. In the long run, this partnership can lead to better decisions, stronger investments, and ultimately, higher returns.
Evaluating Risk in Commercial Real Estate Investments
1. Understanding Market Risk: Investing in commercial real estate means being aware of market fluctuations. Property values, demand, and rental rates can rise and fall unexpectedly. Researching local market trends and economic factors can help investors anticipate these changes and make more informed decisions.
2. Assessing Tenant Risk: Tenant stability is critical to maintaining a steady income stream. Commercial properties often depend on a few key tenants, and losing one can significantly impact cash flow. Before investing, it’s essential to evaluate the financial health and creditworthiness of current tenants.
3. Location Risk: Long-Term Impact: The location of a property plays a huge role in its success. A property in a growing area may appreciate, while one in a declining neighborhood could face vacancy issues. Investors should research future development plans, population growth, and infrastructure changes in the area.
4. Managing Financial Risk: Financial risk encompasses interest rates, loan terms, and the ability to cover unexpected expenses like repairs or vacancies. Investors should create a solid financial plan, including contingencies for unforeseen costs, to safeguard their investment against financial challenges.
Exit Strategies for Commercial Real Estate Investors
Having a clear exit strategy is just as important as choosing the right property when investing in commercial real estate. Whether you’re aiming for long-term gains or short-term profits, planning how and when you’ll exit the investment can make a big difference in your overall success.
1. Selling the Property: One of the most straightforward exit strategies is selling the property outright. Investors often choose this route when the property has appreciated, allowing them to cash out and realize a significant return. Timing the sale when the market is strong can maximize profits, but it’s essential to factor in taxes, broker fees, and other costs that may impact your final return.
2. Refinancing the Property: Refinancing allows investors to take advantage of lower interest rates or increased property values without selling. By refinancing, you can access the property’s equity and reinvest it elsewhere while keeping the property in your portfolio. This strategy is particularly useful for those who want to continue generating rental income but need liquidity for other investments.
3. 1031 Exchange: A 1031 exchange lets investors defer capital gains taxes by reinvesting the proceeds from a property sale into another like-kind property. This is a popular strategy for those looking to upgrade their real estate portfolio without triggering hefty tax payments. The key here is finding a new property within the specific time frame required by the IRS.
4. Holding for Cash Flow: Sometimes, the best exit strategy is no exit at all. Holding onto a property that generates consistent rental income can be a smart move, especially if it’s located in a growing area. Investors can continue to benefit from cash flow, tax advantages, and property appreciation over time, while still keeping the option to sell in the future.
5. Redeveloping the Property: In some cases, redeveloping or repurposing a property can offer a new exit strategy. By improving or changing the use of the property, investors can increase its value and make it more appealing to potential buyers. This strategy often requires more upfront capital but can lead to higher returns in the long run.
Capital Rivers features experts in commercial real estate who keep their ear to the ground at all times. All of the brokers specialize in a specific sector of commercial real estate. They are constantly fine-tuning their market knowledge to best serve their clients. The variety of expertise developed in their careers prior to Capital Rivers benefits the brokers when identifying properties. In addition, it allows the brokers to look at things from a different perspective than just through the lens of commercial real estate.
Capital Rivers operates in a total team environment. They frequently sit down to assess new opportunities or listings to brainstorm and collaborate. This approach allows Capitals Rivers to have many resources looking at the same property, analyzing the entire deal from start to finish.
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At Capital Rivers, we love discussing commercial real estate, especially when it comes to Sacramento, Redding and Chico. If you are interested in learning more, sign up for our email blast or contact us.
