Investing in commercial real estate is not a decision to make lightly. It requires research, expert input, and plenty of thought. Even if you have previously invested in residential real estate, the commercial sector can be altogether different.
Before you start perusing your local commercial property listings, consider the following golden rules:
If You’re Not the Expert, Hire the Expert
We can’t all be experts in everything, and you may not have as much knowledge about commercial real estate as you need if you want to make wise decisions. Fortunately, there are plenty of people who do have this insider knowledge, and it can be worth your while to call upon their expertise when the time comes to pore over your investment options.
Property experts have the latest market figures in hand and can share their insight into rental figures, return ratios, and more. Such information can be crucial when you plan on spending hundreds of thousands of dollars.
Understand Supply and Demand
When you have significant demand for a property, you can generally charge a higher price for supplying it. However, the opposite can be true when supply is abundant.
If you purchase a commercial property in an area with several vacant properties, potential tenants have choices. You may not be able to charge a premium and make decent returns if you’re competing against several other commercial property owners.
Consider the Location
Just as you might consider location when purchasing residential homes, do the same for commercial properties. A property’s location holds considerable weight in rental and capital appreciation, which may serve you well for future sales.
Look for commercial properties in areas with low vacancy rates. This can be a sign of a desirable location that allows you to enjoy a low tenant turnover rate and possibly a high return.
Be Wise with Lease Structures
Lease structures in the United States can be complicated, with many different types and subcategories. Talk to property experts about what will be the most suitable for your unique property type.
Some commercial landlords charge a gross lease, which involves taking a lump-sum payment from the tenant and then using that to cover insurance, maintenance, and taxes. A net lease is typically a lower rental return, but the tenant covers nearly all other property expenses. A modified gross lease is a combination of both gross and net lease terms.
Under net lease terms, a commercial landlord may also propose a single-net lease, double-net lease, triple-net lease, and absolute triple-net lease. These refer to the different expenses both landlords and tenants cover.
Love the Figures, Not the Property
Buying a commercial property for someone else to use is far different from buying a residential home for you to live in. When buying a house for yourself, you look for certain features to increase your enjoyment, such as bedroom numbers, layout, and whether or not it has a swimming pool.
Commercial real estate is much different. You don’t have to like the property, but the numbers and reports have to stack up. It’s okay to hate the décor or its overall design, but if it’s a lucrative business opportunity, then it’s worth striking a deal.
You may already be a seasoned residential property investor, but commercial properties require a much different approach. Before you start browsing commercial properties in your area, keep the information above in mind. It will help you make informed decisions that benefit your bottom line.
