Those who are financially savvy view an investment into commercial real estate as instant success. There are limitless possibilities for business development, as commercial space could be used for clerical offices, industrial companies, healthcare facilities, housing units or retail space. The land alone could present multiple development opportunities, potentially providing the owner with guaranteed long-term income. Before you head off to the bank for a loan on commercial property, consider these pointers for getting started in such an investment.
- Fully understand the scope of the investment.
Although you may feel confident in your plans for a commercial investment, owning and managing commercial real estate is different from owning a residential property. The investment is directly tied to how much of the square footage is usable space. Therefore, the most successful investment maximizes space with multiple units and leasing income. Multi-family living units, such as apartments or condos, tend to produce the greatest return on the investment.
- Know the comparable in the area.
If you are looking for investors to help finance your new venture, they are going to need some indication of the potential for the investment, but they will also want to be confident they are investing in a good deal. Look at area businesses or properties to determine fair market values for your own purchase, but only consider locations which have either 10% greater or smaller footage than your own property.
- Learn the math behind the business.
Commercial real estate has its own set of metric for assessing the value of a property and the potential income with the use of space. If you are able to understand how the financing will work out in the long run, you are better able to work with investors and present a sound case for their funds. The three terms used the most include:
Net Operating Income: a calculation that takes into account all the costs and revenues identified for a property.
Cap Rate: the overall ratio of a property’s asset value against the net operating income
Cash on Cash: a rate of return for the cash that has been invested into the property and evaluates the investment’s performance
Commercial real estate can be a profitable venture, if you are familiar with the overall process and steps needed to make a sound initial investment. Consider these pointers if you are interested in moving towards ownership of commercial properties.