What to Know Before Investing in Commercial Property
Investing in commercial property is all about doing your due diligence.
If done properly, real estate can be one of the best investments in your portfolio, yielding consistent returns throughout the year.
While anyone can invest in a commercial property, there are a few things to know before you dive in.
Is it a good investment?
Real estate is often seen as one of the best investments a person can make.
“Real estate is almost always one of the best investments a person can make,” Forbes contributor Feras Mousa writes. “The potential for property appreciation, plus the continuous rental income stream, makes real estate unparalleled in the investment world.”
That being said, there are some major differences between investing in a residential property versus a commercial property. They are valued in different ways when it comes to square footage.
Knowing the Value
In commercial real estate, it’s all about the usable square footage as opposed to the total footprint of the building. That square footage is typically leased to a business, and those leases are typically much longer than a residential lease.
That being said, location is key as with all real estate. Whether you are focused on investing in industrial, office, multi-family or retail; you have to research the area right down to the neighborhood. Some areas could be a sure bet right now, but a location right for future growth means you’re buying now at a lower price with the potential to see higher returns.
For example, if you are looking to invest in industrial property in Alabama, the initial investment for a property in Birmingham may prove higher while investing in the booming Madison County could be lower. The Birmingham property, if it proves solid, would yield consistent returns; while the property in Madison County may yield lower returns in the onset but may see more significant growth in profitability over time as the market expands.
Analyze Comparables When Investing in Commercial Property
Finding the right commercial property is about research and it’s about network.
There are a myriad of calculations and data to analyze, so it’s important to set yourself up for success by aligning with a real estate broker who has the connections and the know how to negotiate the right deal and achieve the highest possible return.
A brokers network gives them insider access to not only data and information, but also properties that are on the market or soon to be up for sale.
In addition, a broker’s services often go beyond the sale or purchase. They can help you manage the property, determine lease prices and even pair you with qualified tenants.
What are the risks?
Any investment is a risk, and a good commercial real estate investor works ahead to identify those risks and mitigate them. Many of the most common mistakes go right back to being improperly prepared.
Failing to understand the market:
There are major differences between investing in and managing a commercial investment as opposed to a residential property. Not only will a lack of understanding affect your initial investment, it will lead to failures in managing your property.
A broker can help set you up for success while investing, and hiring a great management firm can solve issues as your move forward.
If you aren’t prepared to learn the ins and outs of the data that factors into your property’s overall market value, you aren’t prepared for the risks.
Not doing your due diligence leads to improper property valuations.
A commercial property’s worth more than the initial investment. There are a myriad of variances that an investor has to account for – everything from taxes to property management should be factored into the value.
Doing it yourself.
Investing in commercial property isn’t a great place to “do-it-yourself.” Even if you think you are saving money, you’re often incurring a loss by failing to enlist the help of a professional.
A key way to mitigate the risks is to work with a professional who knows the ins and outs of commercial real estate. A commercial broker is an unrivaled resource throughout the process.
A great broker will save you money on your investment and provide invaluable guidance for managing that investment, much like hiring a CPA will save you money on your taxes.
How to start investing in commercial property?
Do your homework. Once you have researched the ins and outs, align yourself with a team you can trust to provide guidance and negotiate on your behalf.
If you are ready to take the next step and invest in commercial property, Ironvest is here to help.