Commercial Investment Property—a Profitable Investment Opportunity
An investment in commercial real estate (CRE) generally entails a large sum of money. As such, a myriad of factors come into play when deciding where and how to invest your money.
You may already have some idea of what sort of commercial property you’re looking to invest in and the kind of return you want to achieve. Any special purpose investment property can be a gold mine if you get the location and property valuation right. That’s why many real estate investors opt to work with a commercial real estate broker.
Due diligence on your part is imperative even when working with an experienced commercial realtor. So, here are some important questions to ask on your property tour to ensure the investment property is worth your time and money.
1. What’s the Commercial Investment property tax bill, and will it change when I buy the property?
The last thing you’d want is to discover you’re responsible for a tax bill you weren’t expecting. Asking this question beforehand ensures you know what to expect. Moreover, some jurisdictions update their tax assessments based on the value of the property as purchased. If this is the case, you might end up paying significantly more in property tax compared to the previous owner.
So, make sure to check the current tax bill and assessment to determine if your property tax bill will change after purchase.
2. What’s happening in the local market?
Never buy a rental property without understanding the local economic trends. Factors such as crime rates, unemployment rates, and population demographics could impact the value of your investment.
For instance, vacancies rise, and rents decline as violent crime increases in an area. You don’t want to invest in a property that’s vulnerable to such market factors. On the other hand, rising population and income rates are usually quite promising for commercial real estate investments.
Another thing, consider amenities in the area. For instance, if you’re investing in a family home, make sure to consider how close the property is to schools or recreational parks.
3. What’s the vacancy rate?
Turnovers are where most of the work and expenses lie for landlords. As a property investor, you want to minimize your rental property turnovers as much as possible. Vacancies can also be an indication of an underlying problem that’s keeping people and businesses away.
It’s also just as important to consider the neighborhood vacancy rate as well as how transitory the neighborhood is at a specific time. To an investor, a vacancy rate is tantamount to an expense as overtime vacancies will compromise your average cash flow.
4. What’s the property worth?
A property’s selling price doesn’t mean it’s worth that price. The value of commercial properties can be determined using a number of methods. For this reason, it’s crucial to conduct a comparative market analysis to ensure you’re not overpaying for the property. A market valuation will also give you room to negotiate on the price and get the best deal possible.
5. How do the cash flow numbers compare as a short-term investment?
Commercial investments are particularly profitable as long-term investments. However, it’s important to have an exit strategy in mind before investing in a particular property. Short-term investments are under a year in most asset classes except in commercial real estate, where they could run for two to three years. Longer tenures are often more profitable as a result of capital appreciation translating to better returns.
Short-term real estate investing, while not advised, can be done intelligently – especially if you’re looking to diversify your portfolio. Still, you need to be clear about your goals and the time for which you plan on staying invested in a property. Make sure the property you’re investing in is worth it in the long run.
6. What updates have been made?
Unexpected repairs can take a significant bite out of your gains. For this reason, it’s important to understand what state the property is in and whether any upgrades have been made recently.
What’s more, it’s paramount to know what you can do to increase the value of your investment. Considering the value of CRE is mostly driven by the cash flow the property generates, the updates you make should mostly be geared towards either increasing income or decreasing expenses.
7. What’s the income potential?
Ask to see the balance sheets to determine how much rental income the property generates.
On this note, consider whether you’re chasing rental returns or capital gains. A market saturated with similar investors may reduce your rental returns. What’s more, investing in a property with high rental returns but low capital growth means holding on to the property for longer than you’d want. Make sure to invest in a property that will produce the returns you’re looking for rather than one that just seems like a good deal.
8. Do the numbers add up?
When it comes to investing, it’s safe to say that not all property classes are created equal – not even similar types of investments targeting the same clientele.
A few numbers you’ll want to look up include:
- Purchasing costs as well as the interest you’ll end up paying if you’re taking on debt to buy the property
- Monthly income vs. monthly expenses
- Property taxes, insurance, and property management fees
- Vacancy expenses
Also, look at the cap rate to see the return that you’d generate if you paid for the property upfront in cash.
9. Who manages the Commercial Investment Property?
There’s no wrong answer here. Some real estate investors like doubling up as landlords, while others prefer to hire a property manager. Plus, you might want to consider the current management company, especially if they’ve had a great run managing the property.
A property manager can provide professional marketing services and ensure accurate rental pricing. Additionally, they could provide the advantage of higher occupancy rates and higher tenant retention.
10. How will I market the Commercial Investment Property?
Rather, what strategies are there to attract tenants? A property that doesn’t attract tenants isn’t a property worth investing in. That said, maybe it’s not the property that’s the issue but how it’s marketed. Consider some of the advantages of working with a commercial real estate agent:
- They know the local market
- They take time to understand your real estate investment goals so they can find properties best suited to your specifications
- They are specialists in real estate marketing
You’ll find it’s best to work with a leasing agent or a property manager to find well-qualified tenants.
Commercial Investment Property, Retail, Office, or Hospitality? Work with Anthony Maccaroni
Partnering with a qualified, experienced commercial broker is your best bet at making the right commercial investment. Anthony Maccaroni has years of experience in hotel and motel real estate, office properties, and other types of commercial investments. Get in touch today so we can get started on your CRE investment journey.