Commercial properties are often considered good sources of income as well as solid investments. It’s tempting to take the plunge and add a commercial property to an investment portfolio. While it’s true that there is much to be gained, a cautious approach is the most likely to produce positive results. Consider these seven things before investing in a commercial property.
1. Decide What Kind Of Investor You Are
If you’re considering expanding your portfolio to include commercial properties you should first take a good look at yourself and decide on what kind of investor you intend to be. Consider how involved you plan to be and how much risk you are willing to take. Think about your current goals as well as what you hope to achieve in the future.
Investing in residential properties can provide passive income for years to come from the rents you collect. The value of the property itself is another way for investors to generate income if the investment appreciates over time. Making improvements and even renovating and flipping the property is another option.
Investing in commercial properties is suitable for the strategy of passive income from rent, and from gains made at the time of sale. The difference is that investing in commercial properties opens more doors to additional opportunities. An investor may choose to become an active business partner and take advantage of the residual income.
2. Check Out The Competition
When you’re looking at commercial properties with the potential of being your next investment you must consider what kind of business could use the space. Understand your tenant and their needs before you even consider purchasing the building. Their ability to thrive will determine their ability to pay their rent so don’t neglect them.
Take a look at other businesses in the area and consider what kind of competition your tenant will be up against. If the area is saturated with similar organizations competing for a limited number of customers your tenant may struggle. You may have to repurpose the building for a different type of business or invest in a different property.
3. Factor In The Cost Of Renovations
Think about potential tenants the building may attract and consider what they will need to turn the property into the site of a profitable business. If it will need to be repurposed for a new tenant or the building is in need of repairs, you will have to conduct renovations before you can rent it out. It is unlikely that a quick paint job will suffice.
The cost of any changes and improvements will need to be factored in with the purchase price of the property. Look at the place with a critical eye and be generous when estimating the cost of work which needs to be done. Be prepared for more renovations than you were originally anticipating as well as a longer time frame before the building is tenant ready.
4. Analyze Demand
Just like your tenant will have to compete for business in the area, you will have to compete for tenants. Take a good look at local demand for properties similar to any you are considering as the next addition to your portfolio. Analyze how difficult it will be to attract and retain tenants in the neighborhood.
A great place to start is by looking at vacancy rates in the area. Consider how other properties up for lease compare to the one you are planning to buy. Does your property have any unique features to make it stand out? Will you be able to charge a competitive rent and still make a profit? If not, it’s best to move on.
The success of commercial properties is often influenced by the availability of parking. Customers and employees alike require adequate places to leave their vehicles if they plan to go inside the building. Most potential tenants will already know this and a property without enough parking can easily be a deal breaker for them.
Customers will want to park their vehicles nearby or they may go to a competitor with their business. A lack of employee parking can be a big headache. Adequate parking plays a big role in commercial real estate. If there is no onsite parking lot, nowhere to park nearby, and no space to put a lot, it might be best to move on.
6. Prepare Your Business
Commercial property management brings with it unique challenges for your operations. Make sure that your business is prepared with the right infrastructure and resources to handle the job. Tools such as property management accounting software with capabilities designed for a robust portfolio can help you manage your business better.
7. Do The Math
As an investor, the bottom line is that the property you choose to buy must be profitable. You will have to gather all of the pertinent information and do the math before purchase. Above all other things you must know if you can make the deal work.
Look at all of the expenses involved in the purchase. Along with the purchase price there are other costs to consider. Any repairs, renovations, and changes you will need to make to the property along with taxes, fees, financing costs, and utilities need to be accounted for. Additionally, time is money and any amount of time that your property is not being rented will cost you.
On the other side there is the income you could make. Considering the features of the property, the competition in the area, local rents, and vacancies calculate how much you can reasonably expect to charge a tenant. Do the math and figure out if the numbers will work out.
Adding a commercial property to your portfolio can be both rewarding and profitable if you take care and make sound business decisions. When it comes to investing it’s never a good idea to make decisions with your heart. It’s your head that will steer you in the right direction and analysis, research, and preparation will get you within reach of your investment goals.