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Things to Consider Before Investing in Commercial Real Estate

By Al Twitty | May 15, 2017

Investing in commercial real estate is a lot different to traditional investments like stocks and bonds. There are barriers that prevent entry into the market, and you’ll have to find a lender who is willing to offer you a mortgage, which is harder to do than when buying residential real estate due to you needing to put down a hefty deposit. Finding a property and undergoing regular asset management are also things that will take a lot of time. That said, if you are set on investing in commercial real estate, here’s what you need to consider.

The Type of Building
One of the first things you will want to consider is the type of building you want to invest in. Commercial property varies greatly, and includes everything from retail centers and malls, to office buildings, gyms, multi tenant warehouses, and in some cases, land for development. Investors typically need to be able to fund at least 50% of the purchase price, so this may influence your decision. If you are new to commercial investing, it is a wise idea to start off small.

Commercial Building

What’s It Worth?
Upon settling on a few options, the next thing you will want to find out is what the property is worth. If you are buying the property and want to run it as a business, you’ll want to know the company’s turnover and profits, and have a look at their accounts. If, however, you plan on renting out the property, it’s a good idea to look into the average rental rates in your area and how easy it will be to find a commercial tenant. Alternatively, if you are buying the property as a 1031 investment property, you’ll also want to know how any renovations you make will add value to the property, and how much.

It is vital that you consult with an accountant when determining the price of the property, as you want to make sure to take everything into account when determining the expected return on investment.

Seek Expert Guidance
Given the amount of variables with commercial real estate, it is within your best interests to seek expert guidance rather than choosing and buying a property alone. An investment expert will be able to take a look at the figures for a number of commercial buildings, and help you to determine which ones offer the best return on investment. You may also want to consult lawyers, architects, brokers, engineers and lenders to ensure that what you have planned is possible, that everything is legally above board, and that the lenders you are considering will have no problem with your plans.

It is vital that you carefully analyze the pricing assumptions and valuations, and plan a succinct financial strategy before you consider investing in commercial real estate. If you go about everything correctly, there is no reason why you won’t be able to build a successful business. However, if you rush into a purchasing decision, it’s likely it will fail.

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