Investing in commercial real estate can be a significant undertaking, but it’s also a great opportunity to generate income and build wealth. Before you ever enter the market, however, it’s essential to approach this type of investment with a clear plan and thorough research. In this blog post, we will discuss five essential questions to ask when you’re interested in investing in commercial real estate.
1. What is the Potential Return on Investment (ROI)?
Typically, the primary goal of any investment is to generate a return on your investment. Therefore, it’s crucial to understand the potential ROI of the commercial property before investing. To calculate the ROI, you need to determine the net operating income (NOI) by subtracting the operating expenses from the property’s annual income. Once you have the NOI, divide it by the property’s purchase price to determine the cap rate. A higher cap rate indicates a higher potential ROI. By calculating ROI you’re better able to make an informed decision about the benefit of that specific property and more accurately compare it against your other options.
2. What is the Condition of the Property?
The condition of a commercial property is crucial to its value and potential ROI. Therefore, it’s important to inspect the property thoroughly to identify any issues that may need to be addressed. Some common areas to inspect include the roof, foundation, electrical systems, plumbing, and HVAC systems. A professional inspector can help you identify any problems and provide you with an estimate of the repair costs. It’s important to pay attention to this category in particular because neglected maintenance or significant repairs will be costly and will cut into your ROI quickly.
3. What is the Property’s Location?
Location is a critical factor in commercial real estate investing. A property’s location can significantly impact its potential value and ROI. Therefore, it’s essential to consider the property’s proximity to major transportation routes, population centers, and other businesses. Additionally, you must be sure any location-specific regulations allow for your intended use of the space. A property in a high-traffic area with easy access to major highways and public transportation is more likely to attract tenants and generate a higher ROI. Not only do you want your investment property to be geographically well-situated for the type of business you intend to house, but you must ensure that the property’s location has the correct zoning and other regulations to permit your intended use.
4. What is the Current and Future Demand for the Property?
Understanding a commercial property’s current and future demand is essential to its long-term success. Therefore, it’s important to research the local market and identify the demand for the type of property you’re interested in. For example, if you’re interested in investing in retail space, research the local retail market to determine the demand for retail space and identify trends that may impact future demand. Another valuable metric to determine the need for a space is the vacancy rate. How often are spaces like this one left empty? This will help you understand what the resale/rental value of the property might be down the road.
5. What Are the Risks Associated With the Property?
Commercial real estate investing comes with inherent risks, such as tenant turnover, vacancy rates, and market fluctuations. Therefore, it’s important to identify and assess the risks associated with commercial property before investing. Some common risks include zoning changes, environmental hazards, and changes in the local economy. A thorough risk assessment can help you make informed decisions and mitigate potential risks. Asking this question is also a good time to curate a team around you to help mitigate the risks. For example, a great real estate broker, a professional appraiser, a commercial real estate lawyer, and more. With a team of experts around you, you’re able to minimize the risk that you take on, and it’s more likely that you’ll choose a great property to invest in.
Getting Started with Commercial Real Estate Investing
Before investing in commercial real estate, it’s important to ask these essential questions to make informed decisions and maximize your potential ROI. If you don’t quite know where to start or want to begin building your commercial real estate team of experts, reach out to our team anytime at Coldwell Banker Commercial Elite for a helping hand and unmatched commercial real estate expertise.