Top Considerations When Investing in Commercial Property

Jan 13

Top Considerations When Investing in Commercial Property

Deciding to invest in commercial real estate is a big decision, and it is not one that should be taken lightly. Whether you are planning to occupy part or all of the building, lease it to a single tenant or purchase it with lease agreements in place for multiple tenants, there are a number of attributes to look for that can signify a more reliable investment over the long term. Use this guide to discover what to look when investing inĀ commercial real estate.

Location, Location, Location

The old adage says that when it comes to real estate, there are three things to consider: location, location and location. While location isn’t the only thing to pay attention to, it may be the most important. Simply pinpointing an address isn’t enough, so you should visit the destination, see the visibility of the building from the street, view average foot traffic and see what alternatives are nearby. Having the only property of its kind in the neighbourhood can be a big advantage if you can avoid competitors.

Existing and Planned Infrastructure Nearby

Many buyers are swayed by plans for potential infrastructure in a given location. While these factors are absolutely something to note, plans may or may not actually work out. With that in mind, look at the existing infrastructure. Do the roads nearby boast sidewalks that are pedestrian-friendly? Are there train stations or bus stops nearby? Is there free public parking within walking distance? All of these factors can make a commercial property more or less desirable as an investment.

Tenant Quality Already in Place

Many buyers look specifically for properties that already have commercial tenants in place. Therefore, the quality and reliability of these tenants is key to the investment value of the property. If there is a single tenant in place, look for a long contract of several years, a government agency or a large business with several locations and longevity. Otherwise, opt for commercial locations with multiple tenants. This leaves you less vulnerable in the event that a single tenant decides to leave in the future or can no longer pay each month. In addition, vet the earnings and estimated longevity of tenants, as a large corporate headquarters is more stable than a new start-up that has yet to turn a substantial profit.

Quality and Age of the Structure

Even if everything looks and sounds ideal so far, you should also look closer at the building, its potential for redesign and its layout. The age of the construction is vital, as it can influence the likelihood of future repairs. Older buildings may require a full inspection from a professional before you seriously consider investment. The layout of the building is also key, and versatility is the best option. Think about whether the space could be reconfigured in the future if it needed to be used for an alternative purpose. For example, could an existing warehouse turn into smaller offices? Could a corporate headquarters become a retail storefront?

Potential Yield and Current Price

The final stage is to crunch the numbers and determine whether the property is a sound investment. Look at the current monthly or annual yield, and compare that to any mortgage payments. Then, compare it to the average in the area and for similarly-sized buildings in alternative destinations. Look at whether the lease price per square foot for tenants is on par with other locations in your area. Also, ask whether rents are raised based on CPI increases over time or by set percentages annually. Finally, find out who is responsible for repairs, and factor in the costs of what is expected of you as the landlord.

These are just a few of the factors to consider when investing in commercial real estate. No property is free from risk, but carefully weighing your options and putting in the research can help you secure the most stable commercial property in your price range.