Selecting commercial property investments is crucial to get a high return on your investment (ROI). You need to invest in commercial real estate to make your assets profitable. Although all investments have risks, you must ensure that you invest in the right properties. You can do this by considering the following factors when selecting commercial property investments:
1. Your Financial Status
Analyzing your financial status is essential before you invest in commercial real estate (CRE). If you take into account your financial capacity, you’ll understand what type of CRE is most suitable for you. It’ll help you decide whether you’d be better off with less expensive properties such as those that are still being developed, or with the more expensive ones that have already been built.
Moreover, you’ll be more open to a wider selection of commercial property options when you know how much you can afford to lose from your bank account. This may include hospitality real estate, industrial, retail, office, and multifamily.
2. Property Valuation
Based on comparable sales, you can check if a CRE is a good investment through its property value. Here are some factors that may affect CRE appraisals:
- Physical aesthetic, structural integrity, location, and age of the property
- Current infrastructure
- Estimated cost to renovate the property
- Expected income that it can generate
- Estimated value using comparable properties in the area
By understanding its value, you can weigh if it’ll yield profits in the long run.
3. Location And Accessibility
As they say, location has a big impact on real estate investments. It may be best to consider properties that are near major roadways or ones that are easily accessible for your staff or clients. It’s also best to check the local traffic patterns and commute length when people are visiting the property. Moreover, ensure that it has enough space so you can build or add ample parking.
When considering the location, ensure it can accommodate the type of business you’ll operate there. For instance, you may want a property in a space with high foot traffic if you plan to have a retail business. Commercial properties near bus stops or light rails will be of great advantage. But you may want locations near airports if your business has overseas clients.
4. Expected Cash Flows
Cash flow refers to how much money goes in and out of your business. You can enjoy a reasonable rate of ROI from your commercial property investments if it has positive cash flow. If you want to estimate the cash flow of the properties you’re eyeing, you may want to look into the following:
- Cost-benefit analysis of value appreciation vs mortgaged loans
- Benefits of available tax benefits and depreciation
- Long-term appreciation’s effect on intrinsic value to determine expected increase
- Expected profits from rentals
5. Lease Strategies
A triple net lease (NNN) or retail lease strategy is an agreement wherein a tenant pledges to pay the property’s building insurance, maintenance, and real estate taxes. It also guarantees coverage of the regular fees of the rented property, such as utilities, rent, and others. You may have to check if the property you’ll be investing in allows you to apply this strategy. That way, you can enjoy the following benefits, especially if you want to grow your investment portfolio:
- Easier Administration Of Properties: Since the tenants will be responsible for maintaining the property, they no longer have to call you to fix a broken knob, bulb, or other fixtures.
- Lower Overall Costs: This applies to clients with retail stores. You won’t need to incur additional costs because they will take care of all those related to their business operations.
6. Occupancy Rates
The potential ROI and the property’s value may be affected by occupancy and vacancy rates. You should ensure that the seller will disclose such rates in all lease agreements. You need that information to check if the property can create a good cash flow.
You’ll know that monthly cash flow is secure if the vacancy is low and occupancy is high. The property’s value is higher if it already has tenants, so its price is likely higher than properties with lower occupancy rates.
On the other hand, the value of a property is lower if it’s struggling to have tenants. You can buy such a property at a much lower price, but it’d be risky. If increasing the occupancy rate is posing challenges as you manage the property, you may expect to have a lower monthly income.
That said, you need to determine if the CRE will be a profitable asset by balancing its occupancy or vacancy rates.
There are many factors that you need to consider when selecting commercial property investments that yield profit. You want a property within your financial capacity, has good value and occupancy rate, in a good location, can create good cash flow, and allows you to use effective lease strategies. So, before you scour the market for CREs, you might want to take note of these factors. It may even be better if you let experts help you find the best investment.