Commercial real estate investment is a term used to describe an individual, group or entity that purchases properties solely for business purposes. It doesn’t stop there as the properties are then leased to entrepreneurs or business owners who in turn pay rent to the property owner. Properties that fall into this category include office, retail, industrial buildings, and warehouses.
Investing in commercial real estate has many perks. Hence, it is best to do thorough research before jumping into this industry. First, you must have a strong understanding of how the sector operates.
Before discussing the things to consider before investing, let’s highlight the benefits associated with commercial real estate.
- Acquire higher return on investment
- Since leases extend for a longer period compared to residential properties, commercial real estate provides lower vacancy risk
- A steady flow of income
When it comes to investing in commercial real estate, it pays to do background research. This will guarantee you succeed in the industry. Of course, knowing how the market operates is a necessity but conducting regular market research is even more significant. Here are 5 things you must consider before commercial real estate investing.
Just like any business, location plays a critical role when it comes to commercial real estate investments. Check to see if the property location is popular in the market, otherwise finding tenants will be a challenging task. Additionally, do your research about the neighborhood including traffic flow and population. Talk to other property
owners within the area. By doing this, you can make an informed decision about the investment.
Analyzing comparable properties is very important. Invest time in research regarding the prices of properties with similar features, including size, style, and location. This will give you a general overview of how viable the current and future property market in your location of choice is.
3. Choose the right property type
There are different types of commercial real estate including multi-family and net- lease. The multifamily property include apartments, duplexes and much more, and investing in this type of real estate can deliver a steady flow of income, but for guaranteed success, it requires property management.
Net-lease properties, on the other hand, come in different styles including single net, double net, and triple net. Properties that fall into this category include standalone pharmacies, dollar stores and auto-shops, among others. The best part is that the tenant has a responsibility to pay part, if not all, of the building expenses including insurance, taxes and general maintenance.
4. Know the numbers
Just like residential apartments, commercial properties incur expenses including insurance, taxes and upkeep. Prior to purchasing any commercial real estate property, make sure you prepare an estimate of the running cost. This way, you will know whether or not it is a viable investment. Chances are you may find just the right building in a perfect location but the operating income and expenses may be too high. Hire a broker to help you in this regard.
5. Know your potential tenant’s credit
Choose tenants with a good credit rating. Furthermore, the tenant should have access to public credit markets. There are many agencies that specialize in checking a tenant’s credit rating, bankruptcy and delinquencies, so finding one should be easy. A client with a solid credit rating indicates that they have the means to pay rent regularly, regardless of the state of the economy.