Investing in real estate is an exciting venture with significant risks but high rewards. Whether you are investing in real estate stocks, own a REIT, or just plan to rent out your offices, commercial property ventures come in all shapes and sizes. However, if you are considering getting into this market, there are some important considerations to make before committing to any deals.
What Is Commercial Real Estate?
At its most basic definition, commercial real estate (CRE) properties are where business gets done and income generated. Unlike residential homes, where tenants live, your strip mall or office complex creates a work environment.
It may surprise you what qualifies as CRE:
- Manufacturing plants
- Retail premises
- Hotels and motels
- Theme parks
- Hair salons
Additionally, most commercial properties have complex regulatory and zoning laws to comply with, depending on the business conducted and location.
Top Considerations Before Investing in Commercial Real Estate
Commercial real estate investment is much like any other financial venture and requires due diligence into its assets and a long list of other factors. To give you an idea of how in-depth you should research a potential CRE purchase, below are the top five factors you shouldn’t overlook:
Commercial real estate doesn’t shift as frequently with market changes compared to other traditional investments. Still, this doesn’t mean the consequences of such shifts won’t impact your occupancy and vacancy rates. The pandemic underscored this reality when many businesses transitioned their workforces to remote operations.
Barring global pandemics, however, you should be able to ascertain what businesses are impacting your local and national economies. This enables you to keep an eye out for an ideal CRE investment that capitalizes on those market opportunities.
Where your new property is located will significantly impact how well it performs. Factor such as proximity to airports and accessibility to highways, and local traffic issues, can affect every aspect of your investment’s profitability.
If you are purchasing a warehouse an hour away from the nearest railway, you might choose a different location that is connected instead. You want to consider the needs of prospective businesses seeking the space you own. The features of your CRE should meet these demands to maximize its income-generating potential.
3. Know Your Risks
Any property, residential or commercial, comes with inherent liabilities. CREs are at risk of suffering damages and losses in a variety of ways, including:
- Storm damage
- Fire and flood
- Break-ins and vandalism
- Premises injuries to third parties
- Workplace injuries to your staff
- Business interruptions due to structural damage
- Cyber threats and hacking
When you invest in a CRE, you take on all this liability and potentially more. Fortunately, commercial property insurance can insure you against the financial losses claims of this nature can cause. Go here to learn more about how this coverage works and its protections for your real estate.
A comprehensive policy should cover much of the listed threats above. However, you should also consider purchasing general liability insurance for incidents involving third-party claims. For example, if a visitor comes to your new medical facility and sprains their ankle after slipping on an icy walkway. This coverage would deal with any personal injury suits brought against you to pay for their injuries.
To assess the long-term viability of your business property, you should also research existing tenants, their leasing terms, and financial standing. These factors are essential in understanding how your investment will benefit your portfolio.
You should also request any available historical data regarding tenancy to determine if there are consistent dips in occupancy that you should prepare for or address. For example, if you own a warehouse space that specializes in cross-docking shipments, you likely won’t have to worry about vacancy issues. However, if you’re purchasing a medical facility specializing in one area of medicine, you may have periods where finding a tenant can take a while.
At the end of the day, the more flexible the commercial space you purchase, the higher your tenancy rate. Again, though, specialized properties would generate more income despite the increased vacancy risk.
5. Legal Support
CRE investments can be made on your own if you know the ins and outs of the industry. However, having legal support throughout the purchase process is highly advised. You don’t want to find yourself in a situation where vague ownership clauses prevent you from using the property as you see fit or suddenly find a hidden charge needing payment.
Determining the level of legal assistance needed for your investment will also depend on your ownership type. If you opt for a REIT, you’ll likely already have a dedicated management team handling every sale aspect. This allows you to focus on what goals you want to achieve with your investment.
For investors that simply want to buy a CRE and rent out space to different businesses, consider having a legal advisor on speed dial. These professionals can assist in drafting leases, ensuring the validity of terms you wish to include, and handling yearly lease audits or contract breaches with tenants.