When looking into real estate investment some often get stuck on what are the most important factors to look for. Well, look no further! Here on this blog, we will delve right into all of the important parts of investing in commercial real estate. Whether that be warehouses, office buildings or even shop spaces. Let’s take a look!
Property location
Location will always reign and will continue to be the most important factor. It determines the profit chances for commercial real estate investment. It all comes down to the amenities, the popularity of the area and the ability to cater for your needs. As well as the closeness to transport, market and tax-exempt areas. These all play a key role in the valuing of commercial property. This is because it needs to complement the reason in which you are investing. For example, when investing in a shop space, it would be ideal to be near trustworthy transport links to cater for the possible customers.
Another important aspect to consider when investigating property location is the long term view of an area. This means looking at how an area is expected to evolve throughout the investment. An example could be the fields that are currently before you now. In a few years they could be turned into a busy shopping centre. This, in turn, would increase the value and the overall footfall in the area. It is vital to review the ownership of the area you plan to invest in and the planned use of the area.
A way to get these details could be to visit local town halls and agencies that take charge of urban planning. This could give you an insight into what the planning is looking like in the area you wish to invest in.
Property valuation
Property valuation is incredibly important regarding the financing. This is during the property purchase, listing price, investment analysis, insurance and taxation. All in all, this depends on commercial real estate valuation!
The most beneficial methods to use when evaluating real estate are:
- Income approach: Basing it around expected cash inflows
- Sales comparison approach: Comparing it with recent sales of properties with similar characteristics
- Cost approach: Looking at the cost of the land and building work
Profit Opportunities
Researching your profit potential and cash flow comes with great importance. Cash flow refers to the amount of money left after all expenses are paid. All investors of real estate are looking for positive cash flow. This in turn is key to a good rate of return on a real estate property.
- You must develop projections for these modes of profit and expenses:
- The expected increase in long term value
- Expected cash flow from rental income
- Cost-benefit analysis of mortgaged loans
New construction vs existing property
Weighing up the contrast between the two comes as an important factor in the real estate world. New construction typically offers attractive price ranges. Also, modern amenities and an option to customize and make it special to the buyers. However, the risk that comes with new building work is costly. Increased charges, building delays and a newly-developed neighborhood. One with no understanding of its ranking in society yet.
This means that the success of your business or company in a certain area is not in stone in an area not yet developed. In retrospect, existing properties are a lot more ideal. They’re usually lower in cost and have upgrades to the house already standing. Meaning that renovations may not be needed and you would be able to work with immediacy once investing.
Here are some important things to look for when deciding between a new or existing property:
- Consider monthly maintenance costs – these could impact your cash flow
- Review property deeds, surveys and appraisal reports for existing properties
- Review past projects and look into what the construction company’s reputation is for new investments
- Check the quality of the internal items – furniture, fixtures – will they be included in the sale?
Have Indirect Commercial Real Estate Investment
Sometimes managing properties on a long-term plan does not appeal to everyone. However, there are other options for you to still invest in commercial real estate but indirectly. Some ways to do this are to invest in:
- Mortgage bonds
- Mortgage-backed securities (MBS)
- Real estate company stocks
- Real estate investment trusts
Watch your leverage!
Loans can be really helpful, however, they do come at a big cost. They essentially allow you to commit your future income to receive utility today. All at the cost of an interest spread over many years. You must understand the concept of loans. It is important to avoid high levels of debt or over-leverage. Experts in real estate are often challenged by over-leverage when the market goes into a state of liquidity. This is because high debt charges can be very disruptive to real estate projects.
This is all subject to the personal financial position, however, it may be a benefit to consider the following:
- Be aware of terms, conditions and all other charges that could be given by the mortgage lender
- Give yourself time to shop around and find the lowest interest rate with the best terms
Commercial Real Estate Investment Purpose
Investment purpose is very important. Especially when considering the low liquidity and high-value investment in real estate. This creates a lack of clarity on purpose which overall may lead to unexpected results like financial distress!
The best way to tackle this is to identify which of these statements best suits your purpose. Then make a plan suitable for it. Everyone within the real estate will all have different visions and reasons for approaching things how they do.
- Buy and self-use. This approach will save you money on rent and have the benefit of self-utilization
- Buy and lease. This option offers regular income and long-term value appreciation. However, as a landlord, you will need to take on extra responsibilities like needing to handle possible disputes and legal issues, manage tenants, repair work, etc.
- Buy and sell (short-term). This option is quick and easy and brings small to medium profit—the typical property is under construction and sold at a profit on completion.
- Buy and sell (long-term). This option is mainly centered on large intrinsic value appreciation over a long period. This offers alternatives to complement long-term goals, such as retirement.
The Commercial Real Estate Market
Much like all investments, it is important to buy low and sell high! Real estate markets are always changing. Therefore, it is vital to watch out for the patterns and trends. Make sure to invest some time in staying up to date on:
- New properties
- Mortgage rates
Real estate is a highly regarded way to invest your time and money. This industry is generally up in the market even when the stocks are down. It is a way of providing steady cash flow and overall is a good investment when done correctly.
Just like any investment, there are many factors to consider before jumping straight in. Therefore, I hope this article has opened your eyes. Leading you in the right direction to follow your dreams into real estate investing. Do your research, follow the trends and patterns and make yourself an expert. Anybody can do it – why not make today your day?
