Investing in real estate can be a fun and profitable way to diversify your portfolio, and commercial real estate can be especially lucrative. However, you need to be careful before making a purchase. Ideally, before investing in commercial real estate, you should consider the following.
1. Transportation Options
Before buying commercial real estate, look at the transportation options in the area. Do the existing options support how you want to use your building?
For instance, if you are buying an office building or a manufacturing plant, your tenants will want ample parking spaces or proximity to freeways so that their employees can get to work easily. Alternatively, you may want nearby access to public transit.
Similarly, if you are buying a warehouse, you will need to choose an area that semis can easily access to pick up and drop off inventory.
2. Potential Rental Income
To determine if a commercial property is a sound investment, you also have to think about the potential rental income you can collect. If you rent out every part of the building, what is the total you will collect through the year? Will that amount cover your loan payments and the rest of your bills?
3. Availability of Quality Tenants
That said, you won't necessarily be able to rent out all of your buildings, and to be on the safe side, you should think about the availability of quality tenants. Are there businesses in the area that need this type of space? If not, do you think you can entice new businesses to come to the area and rent your space?
When doing your financial projections, take into account what will happen if you can't rent all the space or if some of your tenants fail to make their rent payments.
4. Readiness of the Building
Is the building ready for commercial tenants? Will you need to pay for upgrades to attract quality tenants? Will your tenants need to modify the space to fit their needs? Make sure that you carefully consider these issues and have savings or lines of credit available to cover these types of expenses.
5. Long-Term Value
When you buy a commercial building, you have the potential to earn profits on the rent you collect from your tenants, but beyond that, you should think of the long-term value of your property.
Is it in an up-and-coming area? Are you likely to face increased demand for leased space in the future? Can you charge higher rents in the future? What do you think the long-term resale value of the building will be? You should consider all of these questions. To learn more about investing in commercial real estate, reach out to a realty office in your area.