Any investment portfolio should be well-diversified. To this effect, commercial real estate may be a great way to add a new layer of opportunity to a portfolio that is heavy on consumer stocks and residential property.
While the higher rents and longer lease agreements make commercial real estate attractive, every investment comes with an element of risk. As a result, consider the following five points to ensure that your commercial real estate investment does not turn into a money pit:
1. Research the Market
Keeping tenants in a commercial property is essential. However, if you are attempting to lease to an overserved industry, it will be difficult to find willing patrons.
When investing in commercial real estate, study which industries are set to thrive in your area. Look into all of the leasable square footage in the city that serves this industry. Find out the occupancy rate of each space. Get a tab on the average rent. Look into any additional space that is currently under construction to get a gauge on demand.
All of this will help you understand what the market is for the property you plan to buy. From there, you can calculate how much to charge and come to a conclusion as to how profitable the investment will be.
2. Know the Demographics
Consumer habits vary widely based on demographic lines. Realizing this is fundamental to successfully buying commercial property for investment. After all, you are not just investing in the property, but also the people, culture, and community that come with it.
For example, twenty-somethings are more likely to be interested in affordable apartments than high-end condos, while country clubs will be more popular in affluent regions than blue-collar cities.
Scrupulously compile data related to age, sex, and income to figure out which types of commercial properties would be most appealing.
3. Have Patience
When investing in commercial property, remember that the timeline will be extended for most processes. It will take longer to close on a commercial property than it did your first house. Market research and other due diligence will also take longer than for residential properties. It will take more time to find tenants and start collecting rent. Any renovations will likely require special permits and be dragged out longer than seems necessary.
The wait will be worth it if you get into the right property. Just understand that it won’t happen overnight.
4. Realize the Investment Is Not Passive
Although your money will be working for you in commercial real estate investing, it will need an active hand from you in order to maximize its return on investment (ROI). You need to establish clear systems and processes to ensure that the property is operating at its full potential.
5. Understand the Property’s Carbon Footprint
Regardless of your take on climate change, the movement to create a more sustainable, environmentally-friendly planet is here to stay. Citizens and governments have been doing their part to reduce carbon emissions, however, more ambitious efforts could soon be implemented, with a strong push in place to make major corporations carbon neutral by 2030 or before.
As a result, you may want to think twice about investing in a commercial property that is inefficient in its energy consumption. Not only is it plausible to think that fines or other government mandates could apply to such buildings, but customers are increasingly gravitating toward businesses that they perceive as sustainable, so it could be lucrative to invest in energy-efficient buildings or have a plan in place to make energy-efficient renovations.
Making Smart Investment Decisions
Investing in commercial real estate can be a great way to diversify your portfolio. By considering the aforementioned advice, you can avoid some of the common pitfalls of commercial property investors and help ensure that you are making the most sound investment possible.