Overview: Investing in Commercial Real Estate
As with any other kind of investing, real estate investment is multifaceted. To many, acquiring the title of landlord might mean renting out residential properties.
Although they wouldn’t be making an incorrect association –the majority of investment properties are in fact made up of this type of rentals – another way of cashing in is by investing in commercial real estate.
Any real estate professional could tell you how they consider such properties to be superior to residential ones when it comes to investment deals. They come with an appealing list of pros:
- attractive returns
- additional monthly cash flow
- cash flow stability from long lease contracts
- the valuable economies of scale
- playing field that’s relatively open
- ample affordable, decent property managers
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But how to invest in commercial real estate? How to identify the right property? And what should go into the evaluation process of a chosen property? Success in commercial real estate investment results from four important stages:
Putting together a group of experts
This tip is especially important for investing in commercial real estate for beginners: you need to make sure you’re either equipped with a fair amount of knowledge about said industry or ready to pay people who are. If you don’t consider yourself to be a commercial real estate connoisseur, and you’re wondering how to get into commercial real estate investing, you’re definitely going to benefit from surrounding yourself with helpful professionals.
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Assembling the right team of experts can help ensure you’ll make the right decisions at the right time. They can advise you on how to invest in commercial real estate, give you guidance on the best time to buy a commercial property, help you determine which locations you should consider, and they can surely be an asset when it comes to closing the deal. The following is a list of vital people you should contact when you decide you’re going to take the plunge in becoming a commercial real estate investor:
- Accountant
You would profit from the help of an accountant from the very start of the investment process. Accountants may be able to assist you in figuring out what type of properties you or your business have the funds for. They are also needed in the area of tax analysis, and it’s always better to have a professional to manage budget benefits when it comes to commercial real estate investments.
- Commercial real estate agent
A commercial broker can prove to be a huge resource when you’re willing to invest in commercial real estate, specifically when it comes to spotting potential properties in which to invest. A knowledgeable real estate agent can also help you identify what you can afford, thus pointing you in the right direction. - Mortgage broker
If you’re set on investing in commercial real estate, you’ll most certainly gain from having a mortgage broker to help you sift through all your possible financing options, such as bank loans. - Lawyer
You will need a lawyer at the end of your investment journey. A lawyer can facilitate your close, representing you in the negotiation stage of the buy.
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Choosing the right property
The classic saying “location, location, location” stands true for residential properties, and more so for commercial real estate. However, location is not the sole factor to consider when trying to find a suitable commercial property. Below is a list of things you should keep in mind when you’re vetting investment properties:
- Location
In the world of commercial real estate investment, location is always the first thing to take into account. Convenience is the main reason behind it. Convenience for customers, clients, workers, vendors, and suppliers all boils down to proximity. If you had a business, you’d want a place a customer would actually go. So you have to make sure you’re investing in a property that is accessible in that sense. - Physical condition
When you’re set on a location and you’ve found real estate that you’re seriously interested in that is within your budget, your focus should fall on the property’s physical condition. How was the property used in the past? What is its present state? Make sure you consider wear-and-tear, as well as whether or not there are, or were, any potential liability or environmental issues.
- Permissible uses
You might find a particular property that seems perfect for what you intend to do with it. However, you cannot seal the deal without first checking the property’s allowable uses. As an example, you cannot plan to use a property for manufacturing purposes, without it having the necessary permits that officially declare it as an industrial space. So before making a commercial real estate investment, you have to ascertain that the zoning permits you to do that which you need to do on your chosen property.
- Alteration limitations
A building set in a historic area is probably bound by restrictions when it comes to alterations that can be made to its façade. Before you actually purchase a commercial property, you need to check whether there are any limitations on changes you can make to it, owing to either zoning laws or building contracts or codes.
- Accessibility and parking
A property suffers a loss in worth if it isn’t accessible to everyone, or at least to its intended cohort of clients. Before investing in commercial real estate, check whether a property’s access complies with specific laws, namely the Americans With Disabilities Act. Additionally, you also need to take into consideration whether there is adequate parking space for customers. A business can very easily lose customers if parking is limited or, even worse, inadequate. - Expansion opportunity
Especially in the case of entrepreneurs, a property’s potential to expand is an important consideration. If you think there’s room for business growth, make sure you check beforehand whether or not expansion is permissible. - Leasing opportunity
Business growth might be one’s optimistic objective, but it’s recommended that you consider the flipside as well. What happens if plans fail? It’s important to confirm that leasing is an option. In the future, you might want or need to lease out the property or some extra space, so it’s best to ensure that’s an actual possibility.
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Evaluating the property
How can you master the art of sniffing out a good deal? If you want to know how to invest in commercial real estate effectively, first you have to adopt a landowner’s perception. You have to constantly be on the lookout for any damages that would require costly repairs.
It doesn’t hurt if you’re endowed with a sharp eye for detail. You’ll need to assess risk to ensure the property meets your targets financially. This is where your chosen team of experts will come in handy.
Your real estate agent can be of use by bringing in third parties, namely an engineer, an environmental analyst, and an appraiser. These can help confirm the property’s prior use, its physical condition, as well as any possible liability problems.
However, you should stay in the game and not take the backseat during the evaluation process. You should be an involved commercial real estate investor, especially at this stage, because the more seriously you take this step, the fewer problems you’re bound to have in the long run. Plus, if you find any issues, you can renegotiate with the seller or even walk away from the deal.
Therefore, at this stage of the commercial real estate investment, prepare a list of chief questions, the answers of which will help you determine whether the property is the right one for the business you have in mind. The following are some helpful ones to get you started:
- Is there potential for alterations in nearby properties that might have a negative effect on your business or that might lower your property value?
- Are businesses in the same neighborhood planning on having their leases renewed?
- Is business booming in the area?
- What amount of foot traffic does the location get?
- Are there residential properties in the vicinity?
- Is there potential for more residential real estate to be built in the area?
- What were the vacancy rates with the previous owners?
- What rent are current store managers nearby paying?
- What do they like and dislike about doing business in that particular location?
Are there any existing insurance or litigation claims affecting the property? Were there any in the past?
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Sealing the deal
When you’ve decided on a particular commercial property and are ready to take the plunge, there are two main factors left to deal with: negotiating and financing.
The way these two go down depends on how well you did your homework in the early stages of the process.
- Negotiating with the seller
You can choose to have your lawyer negotiate the commercial real estate investment on your behalf, but really and truly, negotiation should go smoothly and in your favor if you managed to acquire that skill of sniffing out good deals and snuffing out the duds. You should try to find eager sellers – ones who are ready to sell below the market value. Your broker could help you with this. Negotiating with the seller is normally only an option if the seller is motivated. One who isn’t will not be as willing to play the negotiation game with you. - Securing financing
After you agree on a price with the seller, what follows is securing financing. When investing in commercial real estate, as with any other type of property, first you need to determine the amount of cash you’ll be putting down and the amount you’ll be required to finance. The roles of your accountant and lawyer are very important in this phase. They should ensure that the contracts work in your advantage. The contracts should, in fact, be sufficiently detailed, clear and unambiguous. Go over every possible contingency with your lawyer, and make sure it’s covered in the contract.
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As soon as the deed is done, you have to be ready to put your business plan to action. There’s no room for procrastination in the world of commercial real estate. Time is, quite literally, money.
You don’t have to already be wealthy to try to make a fortune from investing in commercial real estate. Commercial properties do not exclusively include office towers, hotels, and mega malls. A beginner or independent investor with some capital could very well invest in single shops, small warehouses or office spaces. What matters is that you are able to manage the costs that come with an investment of this sort, and whether you can handle the time associated with such a venture.
Therefore, before you become a commercial real estate investor, ask yourself whether buying is actually the right move for your business. You don’t want to look back, a year in, and feel you’ve made a mistake. So set reasonable expectations, make sure your revenue growth projections are realistic, and be careful not to overshoot in terms of the amount of space you need; your aim is for the newly acquired property to produce income or profit. That’s the whole idea behind commercial real estate investment, after all.
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