Owning a commercial real estate property can become one of the most lucrative investments that you’ve ever made. On the other hand, it can also be a giant waste of money, a bottomless pit that’s driving you towards financial ruin. Which one of the two outcomes you’ll face depends on how prepared you are to deal with what comes ahead. Here are ten things you need to know about the industry in order to increase your chances of survival.
What is a commercial property?
Commercial property is a broad term that consists of things like factories, office spaces and shops. The reason why this matters to a potential investor is due to the fact that these different types tend to require different management and return the investment in a different way. The cost of rent varies from case to case and the type of people and deals that you’ll encounter when making these deals may vary, depending on the choice that you make. Therefore, the first thing you need to learn here is how to pick the right type of commercial real estate for your own needs.
In the previous section, we’ve just broadly mentioned some of the potential venues that are classified as commercial real estate, which means that everything from retail spaces and restaurants, to warehouses is at play. For you as an investor, this makes a world of difference so before you buy, make sure that you do your fair share of research on the topic at hand. Invest some time and effort, talk to owners of similar properties. Provided that they already have tenants, the truth is that you aren’t direct competitors, which is why they won’t have a reason to turn you down.
Will you be using it?
The next thing you need to consider is your agenda towards the property in question. For instance, are you going to use it as your own office space, do you intend to rent it out or do you just want to sit on this investment for a while until the neighborhood peaks? This may change your perspective on the investment as well as change your perception on whether all of this is worth it, to begin with. When looking for an office for your own enterprise, on the other hand, you’re taking a lot more subjective approach to this situation.
What are rental returns?
In the residential real estate business, there’s a 1 percent rule, which claims that a rental residential property needs to return at least 1 percent of its market value every month. In commercial real estate, however, the numbers are quite different. In general, the property return is about 4 to 5 percent per year. Keep in mind, nonetheless, that these figures go a lot higher, but so does the cost of buying the property. The maintenance is pricier as well, which means that these ratios can change dramatically.
Who will manage the property?
In the first section, we went to length to discuss the existence of different commercial real estate properties, however, the issue of property management is equally as important. This is due to the fact that while anyone can manage a residential home, not everyone can handle a factory space or warehouse. The latter scenario may even require some specialized warehouse management software like CartonCloud. The cost of software license is yours to make, however, it’s more than worth it. If you don’t plan to manage the property on your own, you need to find someone capable of this task.
A contingency plan
One more thing that is more difficult for owners of commercial property is finding new tenants. People move in and out of residential properties every single day, however, when an owner of commercial real estate finds a tenant for their property this is usually a long-term solution. This is why tenant abandonment is such a huge issue. This is why you need to ensure that the place is always in the prime state, as well as that your rent cost is competitive and representative of the area.
The location is crucial
This may sound as universal for all real estate, however, here it has a somewhat different meaning. With residential property, the location only means the neighborhood and proximity to various important venues and landmarks. With commercial real estate, the surrounding infrastructure may play an even greater role. What this means is that you need to have access to roads (maybe even a railway, airport and a port), as well as many other infrastructural benefits.
A buyer’s agent
Finding the right property usually requires having the right help, however, when it comes to making a purchase, you need to consider where the loyalties of the other party lie. A buyer’s agent can, therefore, be of invaluable assistance and help you leverage your position into getting a better deal. Sure, there are a lot of peculiarities surrounding the structure and infrastructure of the building that they might not be familiar with. Nonetheless, their role as a coordinator and advisor can’t be stressed enough.
City development plans
Another thing that you absolutely have to consult are the city council’s development plans. Keep in mind that these plans sometimes go decades in advance. This means that you’ll be notified of some future works and be able to invest before the property in question skyrockets. Just remember that this isn’t always so reliable, seeing as how the municipal government may not be able to provide investments that they’re hoping for. Still, this can serve as a guiding beacon for those who aim to invest in the future.
Plans for the future
The last thing you need to consider is your plans for the future of this property. How do you see this working out? Do you intend to just rent it out in order to have a steady stream of income or do you intend to demolish it and build something else in its place? Are you waiting for its price to grow so that you can sell it better or do you intend to start your own business there? These long-term plans sometimes make all the difference in your property management plans.
As you can see, the issues depicted here are pretty straightforward. The more skilled help you hire and the more effort you invest in research, the better the outcome will be. Sure, when it comes to investment there’s no such thing as a 100 percent guarantee, however, you can at least increase your chances.