6 Tips for Buying Commercial Real Estate
Commercial investment is a valuable investment after choosing the right property. Investors need to do their due diligence and conduct sufficient research before placing a down payment. Commercial properties have the added edge over traditional residential as it equates to higher renting prices, higher purchase prices, and longer leases. However, it also needs higher investment costs and personalized customization for tenants. Before purchasing commercial real estate, here are six tips to consider.
Focus on End Use
Before investing, evaluate the end-use of the commercial property by determining planned goals and search for the investments in mind. The most notable is land banking, where investors buy large tracts of land significant for future development. Besides, fix and flip involves purchasing commercial real estate, making necessary repairs, and upgrading it before selling or, better yet, an owner-occupied estate where an investor runs the commercial estate while running their business on the premises.
Terms of Funding
It’s imperative when delving into the world of commercial real estate funding to study interest rates and debt cycles in both long and short term loans, enabling a stress test of the commercial investments by running imaginary worst-case scenarios for the future. This helps in determining the best kind of funding that is sufficient without draining current cash flows. The best financing package includes a low interest rate over an extended period. Besides, consider other factors, including financial statements, as it’s necessary to determine the amount of financing granted by bankers and other financing institutions.
Contract a Local Commercial Real Estate Expert
Many investors look for the best time when the overall economy fails to get the best deals on real estate, which would have otherwise been not affordable. Contracting a local expert in commercial real estate versed in current market trends guides an investor in the deals that work for them, regardless of their investment parameters. The expert offers advice on other economic patterns to look out for, because financial bubbles affect each real estate differently. Use this information to analyze data provided by the CRE professional to determine the best purchasing time.
Commercial real estate value primarily depends on the market shift. It’s no secret that more businesses are shifting online, and grand malls are getting abandoned for rental storage spaces. It’s then prudent to consider why and where the market is moving and its future. Conducting a study on CRE in urban, suburban, and rural areas is essential to determine the feasibility and flexibility of an investment. Some commercial sector losers can be reused for other purposes, offering the needed flexibility to provide massive profits.
Surrounding Economic Growth
Consistent expansion and growth of an area of investment is a good indicator of commercial real estate viability, helping to find properties that can convert to high-density usage. Check whether the CRE properties can be rezoned to get the least desirable ones with potential to improve. Still, look into similar properties to determine the growth of the market. The demographics of employment is a significant factor to consider to predict the long-term profitability of the properties. The surrounding economic growth guides commercial real estate investors in choosing the best asset with immediate potential and equity, which is achieved by leasing up, repurposing, or even rehabbing for better utilization.
Focus On The Price, Cap Rates, and Profitability
Historical data of an area is essential when considering market data to determine the price per square foot pricing in current times. An investor should focus on properties that have the potential to add authenticity in a particular area, averaging at best in pricing with CRE. However, the investment strategy should focus on the capitalization rate, indicating the rate of return of investment the commercial property will generate in a given time. Focusing on cap rates ensures long-term profitability regardless of purchase timing, as buying when the market is saturated will secure an affordable investment deal.
Commercial real estate value stabilization is essential; however, the most important tip when buying is looking for appreciating value. Consider the CRE location and the future market as it generally takes a longer time for commercial real estate to stabilize than residential real estate. Considering tax implications in CRE is also essential as most are complex, and an accountant will be necessary to determine industrial factors. These factors ensure that an investors’ budget includes all hidden costs.