Questions To Ask Yourself Before Buying A
Commercial Real Estate Property
Commercial real estate offers investors the opportunity for high net returns. They have the ability to not only benefit from the income potential but capital growth in value as well. The right purchase can provide a nice rental cash flow as well as long term appreciation, but it’s important to consider the purchase carefully so you can realize these benefits. Ask yourself these questions before making that offer.
What Is The Demand For The Property?
Of course you want to find a property that is in a high demand area, but when considering a commercial real estate purchase, the demand needs to be sustainable. Who are your potential tenants and what will their future needs be?
Consider the area around the property; is it being still in development or is the community already built? A brand new building could be very attractive if the surrounding areas is older, but if there is new construction ongoing, then the demand for your building could be short lived as other options become available. Conversely, an apartment building in a college town could see steady demand over the years.
Sustained demand affects not only your rental income and vacancy rates, but your resale value as well. Carefully review the current situation as well as any changes to the immediate community and surrounding cities.
Location, Location, Location
Location is always a key aspect of a real estate purchase. This is true for commercial properties just as much as residential but the rules are different. While a one city might be a nice area to buy a home, it could be a terrible location for a commercial investment. To find a profitable commercial real estate investment, you must look at the city from a different view. Again, who is your target market? Can these potential tenants access this property easily?
If you are considering a property which will have corporate clients, you must think as they will. Will their customers be able to find the development? Are there amenities close by for their employees?
Due diligence and careful research needs to be conducted to ensure the location will provide you a profitable enterprise.
Read The Books And Ask Questions
What numbers are you being given about the income of the potential property. If the property has a history of rental income, reading through the provided documentation will be part of your due diligence. But ask yourself if the numbers make sense! Business revenue and costs should be carefully reviewed by a financial professional who specializes in business properties.
Do the numbers add up? If something seems amiss, then more research is needed. Inflated Cap Rates are one of the biggest problems in commercial real estate and misleading information can make a huge difference in your profits.
Consider the guarantees being offered and determine if they make sense to you.
How Good Is The Developer?
If you are considering a newer development, understanding the developer is important. Regardless of how everything else lines up, if the quality of the building is poor, it will affect your profits. Everything from faulty electrical to leaky pipes can quickly increase your maintenance budget. Extended problems could also create vacancy issues and other damages.
Investigate the developer’s reputation and track record before investing in new or newer construction.
Have An Exit Plan
Planning for the eventual sale in the early stages of investment is a crucial element of commercial investing. A commercial property investment is normally a long term proposal, but if you need to access your money sooner than expected, understanding your options before you buy should be part of your research.
Long guaranteed income periods offer the best opportunity for a flexible exit plan. Investors normally have the ability to leave during the investment cycle by offering buyers an attractive position. They have a fully operational business model with proven results. A high Cap Rate and healthy capital growth is achievable and allows the investment to be highly saleable. This flexibility will be difficult for shorter guaranteed income periods due to less attractive investment conditions for resale.
Another common investment options is a guaranteed buy-backs. These offer some flexibility but should be carefully evaluated before investment. The buy-back should be evaluated for historical proof of performance and not merely based on projections.
How Does This Opportunity Fit With My Portfolio
What are you objectives for making this commercial investment? Investing in commercial real estate could be a part of a larger real estate portfolio or it could be a way to diversity your other investments. Consider the risk/reward of the opportunity and how it fits with the rest of your portfolio. Does this purchase offer a long or short term opportunity and is that what you need for our own objectives?
Risk
As with all investments, evaluating risk vs reward is a crucial part of doing due diligence. A successful investment plan includes ways to mitigate risk. Careful analysis of the key aspects already listed above is a good way to do this. You must also review all contracts carefully. Ask yourself what the worst case scenario might be and could you work through it? What reserves do you have available for this investment once you purchase to hedge against unexpected issues?
A high risk commercial purchase might fit nicely into your portfolio, but make that determination with your eyes wide open.
Commercial real estate offers solid opportunities to investors. The right situation can provide a secure, profitable long term income stream. Couple this with capital appreciation in advancing communities and developments and it can be an important part of your portfolio. Work with your commercial real estate adviser to evaluate these opportunities. Ask the right questions and seek advice and information from experts. Do your due diligence in advance to ensure you are making the best decision for the health of your financial situation.
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