A Beginner’s Guide to Investing in Commercial Property
April 6, 2021
“When you invest, you are buying a day that you don’t have to work.”
Investing in commercial property can be quite lucrative. However, it requires thorough research, patience, and a lot of skill to do commercial property investment right.
If you are looking to invest in commercial property, there are some basic things that you need to know to begin with. In this article, we are going to talk about all those things that a beginner should know before taking the first steps in this industry.
Things to Consider When Investing in Commercial Property
Here are some important things that you must consider when investing in your first commercial property:
1) Budget planning
Commercial property is a big investment, which you simply cannot afford to make without proper planning. This is the reason that one of the first things you have to decide is the amount of money that you can afford to invest in commercial property.
How much down payment you can afford to make? How much loan can you get? You need to get answers to questions like these first. In simpler words, you need to fix a budget and then begin searching for a property accordingly.
How do you do that? Here are steps that can help you plan your budget how:
- Expertise advice individuals to follow the 28% rule, which states that mortgage should never be more than 28% of your monthly gross income
- Get to know the amount of preapproval loan that you can get based on your credit history and financial circumstance
- Assess your monthly household expenses by creating a list of unavoidable spending, tax deductions, insurances and utilities, to name the major ones
2) Return on investment
This, of course, has to be one of the most important things to consider. Based on the type of property you are investing in, you need to assess the returns as well.
How much income will the property generate? If you are taking a loan, how much time will it take for you to repay it? You need to get definite answers to these questions before you actually plan to make the investment.
Now, the question is how can you find answers to these questions?
- Add up the income potential that you expect to make from the property over a period of time, say one year (this would be an estimate based on the current market rate that you can figure out by getting in touch with some local real estate agents, asking people in the neighborhood, and so on)
- Subtract the expenses that you expect to incur (this will include charges such as maintenance expenses, taxes, utilities, and the security charges)
- Now, divide the amount that you will get by the total investment that you plan to make in the property and you will get the ROI.
3) Allowable purpose of the property
Another important piece of information that you need to get before you invest in the property is its allowable purposes. What this means is that the kind of business the property is most suitable for.
For instance, the requirements of office space for a legal firm would be different from that of a manufacturer looking to use it for industrial purposes. You need to figure out the allowable purposes before you close a deal.
Ask the broker to provide you with all the information. You can further cross-check the information with the concerned department to make sure that you have accurate information. Also, don’t forget that the taxation laws would be different for different types of commercial purposes. You must first get information on the allowable purposes of the property, and then about the tax liabilities that come with it, from the concerned authorities in order to have a clear picture of everything.
4) Location and neighborhood
Like every other property investment, it is imperative to consider the location of the commercial property that you are planning to invest in. Whether you are looking to buy, rent, or lease, location is the most important factor.
As clearly highlighted in the second point, the requirements of location would vary based on the purpose you are going to use it for. A good commercial property, in a poor neighborhood, is going to be a bad investment, which you would certainly not want to make – would you?
For instance, if you plan to rent out your property to a retail store or a food joint, you must look to invest in a property that’s located in a busy neighborhood. In a similar way, if you intend to rent it for industrial purposes, then you must pay due consideration to the easy access to local commute options like vicinity to subways or the bus station.
5) Physical condition (and limits to modify)
The physical condition of the property would define the amount that you will have to pay for it. Does the property have any visible wear and tear? Is it the right fit for the type of commercial investment you are looking to make or will it require any repairs? If it does require any modification to suit your purpose, is it allowed? And how much will it cost you?
You need to consider all these factors before you actually, make a deal.
6) Any hidden costs
Last but definitely, not the least thing that you cannot afford to ignore is the hidden costs that are generally associated with a commercial property. These costs are generally associated with the regular maintenance and running of the property.
For instance, costs for any support services associated with the property such as security, lift, and so on if the property is located in a commercial complex and so on. It is always a good idea to know about these costs, and include them in the contract before you sign and seal the deal.
Generally, factors like this and the one mentioned prior to this form part of the commercial agreement that you will be signing to finalize the deal. You need to go through the agreement thoroughly to understand all the terms and conditions mentioned in it, and only then sign it. If there is even an iota of doubt, don’t move forward with the deal.
A genuine real-estate broker will always provide you with all this information. In case, the broker does not, you can ask these questions upfront.
As you can see, there are a number of things that you need to consider before investing in commercial property. Although with a little care you can easily plan out all these things and make the right investment, it is highly recommended that you don’t rush with making your decision. Take time to analyze your goals, your personal circumstance and gain knowledge of the industry before you invest.
You can see professional help from a Negotiator Recognized Partner, who can assist you in not just finding the right commercial property for investment but also carry out negotiation on your behalf to make the entire process easy and hassle-free.
So, are you geared up for making your first commercial property investment by following the words of wisdom shared in this post?