Buying commercial property can be an excellent investment. That’s true whether you are buying it to rent, renovate and sell, or use for yourself. When you choose the right places, you can find yourself with a portfolio that keeps increasing in value and has many streams of revenue every month.
That said, because of the costs involved, buying a commercial property can also be riskier when compared to residential. With residential, there is a good chance you will be able to find someone to purchase your home, even if you take a loss. If the economy or something within the market changes, you could end up with a commercial property albatross around your neck if you are not careful. To mitigate that risk, here are some factors that you should examine when you are purchasing commercial property.
Location, Location, Location
They are the three most important words in real estate, and they are as applicable to commercial property as they are to residential. When you are looking at investing in commercial real estate, you need to examine the locations of your prospective properties. The ideal location will depend on what type of property it is. If it’s a retail property, you will want proximity to roads, public transportation, and possibly other retail spaces. You may want a place with ample parking and lots of storage.
If you are looking at purchasing a warehousing facility, being close to a main road is crucial. You will also need to ensure that the type of commercial operation you want on that property will meet local zoning laws. Otherwise, your investment will be worthless if you don’t have other plans for it. Also, check and see if there are other development plans for the area since that could increase the property’s value in the future.
Your Investment Goals
Before you buy, you need to determine your goals for your investment and what type of commercial property owner you want to be. For example, do you want to purchase something at a lower cost and rebuild and renovate it? This will allow you to make a quick profit, assuming that your additions and fixes have increased its value. On the other hand, maybe you don’t want to commit to doing the work, and you want to be the one to purchase someone else’s property flipping project.
On the other hand, you may want to find a long-term investment to help you with some income while preparing for and entering retirement. In that case, you should choose a property that looks stable and is in a quality neighborhood for what you are purchasing. Again, as opposed to a quick profit, you are looking for a steady revenue stream.
As well, there are different types of property owners. You can be hands-on or hire a management company to do the work for you. What kind of owner you want to be will affect what type of property you should purchase. Do not think you will take on an ownership role that you are unprepared for and do not have the expertise to handle.
Commercial properties are huge investments. If something happens to one of them, you could find yourself in deep financial trouble. Every property carries some risk that is not related to the investment risk. For example, it could be located in an area prone to flooding or that experiences higher rates of crime.
You must have reliable coverage for your business property that protects against the specific risks that the property faces. If the stakes are too significant and the insurance costs too high, you can choose another suitable location. It is not an option to avoid having insurance altogether. You may never need it, but you will be thankful you have it if you do, and you will be able to sleep better at night too.
Getting funding for a commercial property is more complicated than a residential one. First, you will need to deal with financial professionals specializing in commercial property financing. You must have a good credit score, so do not even start the process if your credit is poor. You may also need to provide a sizable down payment, so make sure you have the funds available. The amount will depend on the amount of the mortgage that you require.
Make sure to get an independent property appraisal to give you an unbiased view of the property’s potential value. That way, you mitigate the risk of paying too much in the first place and of the bank trying to offer you too much of a loan that you will be responsible for. You should also never buy a commercial property without the assistance of professionals, such as a real estate lawyer and an accountant that specializes in commercial property taxes. They will help you be as efficient as possible with your funds and avoid tax pitfalls.
Do a Thorough Analysis
Investing in commercial property is like any other business: you need a clear plan to map out how it will make you money. So, when you are looking at prospective properties, create a business plan in your head. If it’s a property you want to flip, itemize all of your construction and renovation costs and place them besides how much you think you will make in the subsequent sale. If the numbers make sense, then you can move forward.
The same goes for a property you are planning on leasing. Not only do you need to find a property that will gain value, but also one that will attract tenants. Map out in your business plan how you will find new tenants, how high your rents will be, and what lease terms you will want to have. This plan will help you decide if your commercial property is feasible for your purposes or if you should look elsewhere.
When you buy a house, you are looking for a nice place to live. You examine several factors to see if the price is right for you and if you could see yourself being in the home for years to come. With a commercial property, it’s slightly different. There are many factors to consider, and they mostly boil down to how well a given property will bring in revenue. Using these factors listed above, you can make an intelligent investment choice and bring in the profit you are looking for.