Real estate investments can be very rewarding in the long term.. It gives you consistent returns and incomes and has high growth potential. People who look for great returns are chasing this asset class, either investing in it directly or via a passive fund. However, no two properties are identical or can give you consistent returns. Here are some things you need to know about commercial real estate (CRE) before you sign the dotted line.
Shouldn’t Two Property Types Are the Same in Commercial Real Estate
Commercial Real Estate is a broad term, it consists of many asset types like office real estate, industrial real estate, multiple family real estate, or special purpose real estate. The returns, supply and demand, and profitability of each asset type vary greatly.
One main deciding factor is the property’s location. Other factors that directly affect the property’s value are the supply and demand dynamics of the particular area, Government rules and regulations, and the current state of the economy.
Currently, investors are making a beeline to invest in industrial real estate, as this form of real estate is mostly recession-proof. On the other hand, due to the pandemic and slowdown, retail real estate has become uncompetitive.
Vacancy for commercial real estate can vary wildly- warehouses and office complexes may have a single tenant while others like retail or small office complexes may have multiple tenants. It is for this very reason that commercial real estate investors spread out their investments in various asset classes. Many more, who have the capital to invest but do not know where to do so, consult a real estate consulting firm to help them choose where to invest and maximize returns.
You need to understand the market dynamics
Property prices depend a lot on the demand and supply situation in the market. When you are investing in commercial real estate, you are investing in a particular area with its own demand and supply dynamics. For example, if you are leasing out your space for a hospital when there are none in the area, you stand to potentially gain a consistent income from the tenant.
Commercial real estate cannot be bought without a detailed analysis of the area. That is why many investors consult commercial real estate services to guide them choose the best property to invest in.
Understand the economic market cycles
The current economic situation could have a big impact on your CRE investments. The health of the economy, unemployment rate, and GDP can impact the profitability of your investments. You need to check out various indicators to know what kind of business will work in your locality. It is best to take the help of a professional real estate analyst to make a sound business decision.
Do your research well
You may have many opportunities to invest in commercial properties, but what may look attractive on the outside may not be worth it. You will need to check the financials, tax returns, profit, and loss statements, or other details to choose a property that will give you consistent returns.
Many first-time commercial real estate investors get influenced by what people say and make wrong decisions in haste. If you really want to profit from commercial real estate, you will have to make an informed decision.
Here are things you should consider –
- If you plan to buy and develop a vacant property, confirm with the local authorities if you can develop the same as you intend to.
- If you plan to expand an existing property, research the market to know how many additional units you can create.
- Familiarize yourself with the local permissions and paperwork you will need to do while buying commercial real estate.
On the other hand, if you are investing through a fund manager via Real Estate Investment Trusts (REITs), crowdfunding, or private funds, you will need to-
- Speak with past participants about their experience with the fund manager.
- Look at past investments and actual returns received on closed investments.
- Talk with the fund manager to know what their due diligence process is like. Examine the way they vet each property they invest in and what their previous track record was with regards to commercial property investments.
- If you are investing with a large-scale real estate investment firm, a background check should be done even if the company has a good reputation in the market. This may sound severe but is always done whenever big amounts of money are at stake.
Have a Contingency Fund
Every investment comes with uncertainty. There could be unexpected expenses that could crop up or you may have to foot the bill as the tenant may delay the rent. Other unexpected expenses could be damages due to natural calamities or unexpected disturbances in the working of your tenants’ business. As a rule of thumb, you should keep aside at least 3-5% of your gross rents for such expenses.
Investing in Commercial Real Estate can be a great source of passive income. However, this does not mean all commercial real estate properties can give you the same returns, the returns you receive depend a lot on the location, current business dynamics, and the potential for consistent business for your tenant. Whatever you do, you will need to make an informed decision based on hard facts, not on assurances from people.