Investing in commercial real estate can be a fun and lucrative undertaking.  In fact, the annual ROI for commercial properties typically falls between 6 and 12%, depending on the health of the local economy and location of the property, among other factors.  These types of figures can make commercial investment extremely appealing, but it’s more than just a numbers game. Successfully investing in commercial property takes research and preparation.  The more that you understand the ins and outs of commercial investing, the less likely you are to fall victim to some of the pitfalls that can come with the territory.  Here’s everything that you should know prior to investing in a commercial space to ensure your success.

Understand What the Term Means

The term itself, “commercial property” is actually quite broad.  When you break it down, there are five main types of commercial properties; industrial space, office space, multifamily properties, retail properties and special purpose properties.  Broken down even further, you might find more specific niches, such as hotels, medical office space, self-storage facilities, land, elder care housing, and more.  Understanding the differences between these could be the difference between success and failure as an investor.

Market Dynamics

To understand exactly how property type can be so influential, you have to also understand the importance of knowing the market dynamics in your area.  This largely includes knowing the supply and demand in your local market for particular types of properties.  The higher the demand, the more lucrative your investment will be.  That being said, you can also likely expect to pay a higher premium up front for the property if the demand is high.  Real estate markets are constantly fluctuating, so watching the trends in your area is crucial to your success.  You may be able to buy a property now for a lower price, knowing that the demand for that property type is likely to increase in the future.  The health of your local market is imperative information that deserves diligent research.

Vacancy & Rental Rates

Within the commercial property that you are looking to invest in, you have to know the percentage of all of the available units that are not currently occupied.  This helps you to assess how much work you will have to do to secure tenants, what rents you can expect to be bringing in immediately and how that will offset the initial investment costs.  Another part of this is diligently researching rental rates with comparable properties in your area.  How much can you realistically ask for your space?  Also, how long are competitive properties sitting on the market, on average?  All of this information will assist you in making a fully informed decision.

The Importance of Location

Even within an individual market, there can be huge fluctuations in price and demand based on property location.  Location is potentially the largest influential factor that will determine your success as an investor.  That doesn’t necessarily mean that you have to pay top dollar for a prime commercial property, either.  Sometimes up-and-coming properties can be extremely valuable investments.  The main things to look for are low vacancy rates in neighboring properties, good connectivity and exposure, and the presence of some established businesses within the area.  These elements can have a big impact on your ability to generate regular rental income that boasts high capital appreciation.

Building Quality

Not all commercial properties are created equally, and this is important to remember.  Just because a property may appear one way, doesn’t mean that you shouldn’t do some deep digging before you dive in headfirst.  The stability of the building structure (foundation to roof and everything in between) and the quality of the materials used (both inside and out), among other things, can greatly impact the return on your investment.  Purchasing a quality property will also help you to avoid costly expenses later down the line.  Make sure that you are hiring a qualified inspector and/or contractor to go through the punch list with you.

Time Investment

It’s also important to recognize that both purchasing and maintaining a commercial property can involve a bit more time than a residential property.  To close on your investment involves four main stages:

  • Escrow: This part of the process ensures that both parties in the sale have met the agreed upon requirements.  It is a much more formal process with CRE transactions with more extensive paperwork.
  • Legal entities and authorities: Unlike residential transactions that take place between two parties, commercial properties are typically carried out between two or more legal entities and may have multiple contracts.  This can add a lot of time to the process.
  • RESPA and due diligence: The Real Estate Settlement Procedures Act protects buyers from purchasing potentially hazardous or faulty properties without full disclosure and, because buyers will often push for more time in this process in commercial transactions, it can become lengthy.  It also influences the due diligence process, which becomes much more extensive.
  • Title and closing: Lastly, the title and closing will need to be signed and there is far more paperwork included in this process than in a residential property because of zoning and environmental clauses, among other things.

 

Maintaining the property is, in and of itself, a time-consuming undertaking, as well.  Will you work with a property management company or maintain it yourself?  Who will collect rents, maintain the landscaping, monitor the structural integrity of the building, et cetera?  There are lots of factors to consider here.

Is Commercial Investment Right for You?

As you can see, there are lots of factors that play into a successful commercial real estate investment.  The best idea?  Don’t go it alone!  Working with a reputable commercial real estate broker can help you to navigate the Salt Lake City commercial market with ease, while also ensuring that no steps are skipped in the process.  Contact SVN Alta Commercial today and let us invest in your success.