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Home » Property Management » Key Considerations When Investing in Commercial Real Estate

Commercial properties – e.g. malls, offices, and multi-family properties – generate more income than residential properties. That is why many experienced investors choose to expand their portfolios with this property type. But before you buy a commercial property, it’s important to consider a few factors. In that way, you can make sure you put your money into the best possible asset.

Besides investing in commercial property, you can convert residential property to commercial property if you think it’s a better opportunity.

#1 Ask Yourself Why You Want to Invest

As with any investment, you must first ask yourself why you want to invest in a particular property. What are your investment goals? What do you want to get out of it? For example, you may simply want to purchase a commercial property as your retirement plan. In that case, you’d need something that can generate a consistent cash flow and wouldn’t need too much hands-on management (of course, you can always partner with a commercial property manager). Or, let’s say you’ve always wanted to own commercial real estate, but your market isn’t as booming as other markets. If that’s the case, you can consider purchasing properties in other markets.

Since the type of commercial property you purchase depends on your goals, it would be a good idea to consult a property management agent. They can narrow down your options and help you find the perfect property.

#2 Take a Reasonable Amount of Time to Choose a Property

Don’t go with the first property you’re presented with. Even if you find what seems to be a great deal already, it’s crucial to carefully consider your options. It helps to partner with a real estate agent or property manager who will show you a wide range of properties that meet your requirements. They should be able to consider what you want, what you can afford, and how much profit you can expect to earn from your commercial space.

Do note that the process of purchasing a commercial space tends to take more time. The reason for this is that commercial property owners often have very specific requirements, so it usually takes them quite some time to find the perfect one. So take your time, but remember that the longer you go without property, the longer you’ll go without cash.

#3 Run the Numbers

Run the Numbers

Purchasing a commercial property is not the same as purchasing a residence. Since the main purpose of commercial property is to make money, whether through rent or capital gains, it’s imperative to verify if can actually do that. You must only decide whether or not to buy a particular property once you’ve run the numbers.

Run various tests that consider the interest rates, vacancy costs, improvement costs, etc. Get an idea of how much money you’ll generate, and whether or not your anticipated income can offset your costs. Find out how long it will likely take you to fill your vacancies, and how much time you’ll likely lose during that time.

It’s worth partnering with a commercial property management company that can conduct these tests for you. They will have the data to verify whether or not your property has profit potential.

#4 Consider How the Building is Classified

Commercial properties are pieces of real estate that are used for income-generating purposes. These properties are often classified as Class A, B, or C. It’s crucial to understand what these classifications mean for you as a commercial property owner.

Class A properties are the best building you can buy, as they’re newly built and are located in prime locations within the city. Class B properties cost less because they’re not new construction, but they’re perfect for investors who are interested in restoration. Class C properties, on the other hand, are old properties that need a ton of maintenance, but come with very low prices.

Due to the reduced risk and lack of need for improvements, Class A properties are the most ideal investments. However, the reality is that not all investors have the capital to pay for them.

#5 Opt for Flexible Properties

One of the many challenges of commercial properties is that today’s tenants want to be able to use their space flexibly. For example, the popularity of online shopping has reduced the need for in-person shopping. That’s why many companies have altered their commercial spaces to include areas that allow customers to collect items they’ve ordered online. And because of this, many companies no longer need such a big commercial space.

The businesses that rent from you will have to adapt to their customers’ ever-changing preferences. In other words, your tenants need a place they can tweak whenever they want. This is the inevitable truth. Hence, it’s important to find a commercial property that can be modified over time to suit your commercial tenants’ spatial needs.

#6 Inspect the Property’s Condition

Inspect the Property’s Condition

Even if your property was classified as Class A, you should still be aware of even the most minor structural flaws, because they are present in most commercial properties. Have the property properly evaluated before you purchase it to identify any potential problems, such as mold or asbestos.

If you’ve purchased a Class B or C property, then there’s a good chance it comes with a few flaws. This means you’ll probably have to conduct a few improvements before it can be rented out.  Apart from the expected repair costs, plan for the unexpected, as well. Find out if your property has the capacity to generate enough income to cover the costs of unplanned repairs. And as always, shop around for a property management company that can conduct preventive maintenance. In that way, you can reduce the risk of repair-related costs.

#7 Keep in Mind that Location Is Key

Location may be critical when choosing a commercial property, but since your property is for business purposes, don’t focus on what you want. Consider what your tenants and their consumers would prefer. You do not want to purchase a property that doesn’t get enough foot traffic. Low foot traffic means not as many customers, and that means low income for your tenants. Ultimately, this means your tenants won’t be able to pay their rent on time. Plus, they’ll probably end their rental contract and move to a building where they’ll actually have customers come in every day.

Everyone who visits your property (your tenants, their customers, your staff, etc.) must have convenient access to parking. Or if not, it should at least be near public transportation.

Commercial Real Estate Is a Serious Investment

Keep these tips in mind to make sure you make the correct choice with your commercial real estate investment. And remember, since commercial real estate isn’t a small investment, you must first obtain all the facts, figures, etc. you need to be able to make an informed choice. An expert company such as Luxury Property Care can help you look into potential properties, study the market, and find out if it’s feasible.

If you’re planning on investing in commercial real estate, call (561) 944 – 2992 or fill out our contact form. We’ll guide you through the investment process and create a strategy that aligns with your goals.

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