Four Things to Consider When Purchasing A Commercial Investment Property
Commercial real estate can yield significant returns for landlords. However, like any other investment, there are certain risks involved when purchasing a business property. Knowing what to look for during the search process can help investors discern the opportunity for profit – or pinpoint the potential for loss. Here are four factors to consider before moving forward with an investment property:
The capitalization rate, or cap rate, compares the net operating income to the overall property asset value. For example, if a commercial property recently sold for $2,000,000 and had a net operating income of $200,000, then the cap rate would be 10%. Understanding the cap rate can help investors establish cash flow and profit margins as well as help with budgeting.
Location, Location, Location
Yes, even in commercial real estate, location matters. Is the property you’re considering located somewhere that will attract the type of tenants you’re targeting? Building amenities are important. However, beyond the facility itself, renters will also look for things like easy commuting access, surrounding businesses, and even perks like nearby gyms, shops, and restaurants. Put together a list of must-have location-specific features that will appeal to your demographic to ensure your investment delivers what renters want.
Go into the search process asking several essential questions about the property. What’s the current occupancy rate? Is it typically at maximum occupancy? Or have the current owners struggled to find tenants? Not only will you want to explore the property’s rental history, but you’ll also want to find out about the leasing terms of existing renters. Are the current tenants signed to long-term leases? Or will you have to start advertising the property immediately after purchase to maintain cash flow?
Commercial properties designated as a “value add” investment generally means that buyers may have to have work completed on the building to attain higher rent rates – or to even be able to rent it out at all. Typically, value add requirements fall into three categories:
- Deferred maintenance
- Exterior updates
Value add isn’t necessarily a deal-breaker – investors often have more room for negotiating on a fixer-upper property. However, it’s important to know exactly what the building needs as well as the potential return on investment before moving forward with an offer.
Are you considering a commercial property investment? We can help. Contact Avid Commercial today to learn more about our real estate loan programs.