You may be interested in commercial real estate as an investment opportunity, but unsure where to start. Before beginning a property search, potential investors should delineate their purpose for the acquirement—such as making the purchase solely as an investor or going in as an owner-tenant—evaluate their risk tolerance, and secure equity.
Once these steps are taken, investors can begin researching and touring commercial investment opportunities. As you evaluate potential investment properties, here are the top five items to look for to ensure the space is worth your resources.
Location is one of the most important factors to consider when purchasing an investment property. You’ll want to evaluate the neighborhood, visibility of the property, freeway access, traffic counts, and accessibility for clients in order to ensure the space will be attractive to tenants.
A critical step in your property evaluation is conducting adequate physical inspections. You’ll want to have a clear understanding of the condition of the roof, mechanical systems, plumbing and structural integrity of the building. Inspections such as a Phase I Environmental Site Assessment will check if historical utilization of the property poses threats to the environment, and help determine the true property value and alert you to potential problems.
Get familiar with the current and forecasted trends of the area around the property. It’s wise to choose a property where the demographics are stable or growing, and you should also learn which new businesses are moving into the area. If there are any anticipated changes to the road systems, it’s smart to be aware of those as well, as property values may change when roadways are diverted or modified.
Investors often look for properties with tenants already in place. Tenants’ reputations within their specific market can speak volumes about the character of a business owner, so you’ll want to take a closer look to ensure reliability. When evaluating tenants, think like a bank underwriting a loan, and look for the “Three Cs”: credit, collateral, and capacity to repay. Take it a few steps further and also investigate tenants’ cash flows and the growth projections for their specific industries.
You should choose a property that provides you with flexibility in the event that a tenant defaults, the surrounding area changes, or something else doesn’t go to plan. In these situations, you’ll want to have the ability to change use types or zoning to attract different tenants.
Commercial real estate can be a great investment that can diversify your portfolio and provide you with additional income. When you select a space based on the above criteria, you’ll feel confident that your property investment is worth every penny.