What to Know When Considering a Commercial Property Investment

What to Know When Considering a Commercial Property Investment

For 35% of Americans, real estate is the most preferred long-term investment, and it’s easy to see why.

Real estate investing has many attractive benefits, including the potential for high returns, passive income, and asset appreciation. Plus, with the recent rise in popularity of crowdfunding platforms and other alternative financing options, it’s easier than ever to get started in real estate.

One type of real estate investment that’s particularly well suited for beginning investors is commercial property. Commercial property investment includes office buildings, retail space, warehouses, and more. In the United States alone, commercial real estate is a $1.1 trillion industry as of 2022. 

As with any type of investment, there are certain things you need to know before you dive into the world of commercial real estate. In this blog, we outline several of them.

Your Goals and Objectives Should Be at the Center

When investing in property, you should clearly identify what you want to achieve with your investment and then make sure that your actions are aligned with these goals. 

For example, if your goal is to generate income, then you’ll want to focus on properties that are likely to produce a strong return.

On the other hand, if your goal is to build long-term wealth, then you’ll want to focus on commercial property options with the potential for appreciation. Visit Ballard Built to learn more about some of the best property options to consider. 

By keeping your goals front and center, you’ll be more likely to achieve success with your investment.

Location Is Key

Success in property investment largely depends on the location of the property. If you choose a prime location, you’re more likely to see strong demand from tenants and healthy returns on your investment.

On the other hand, if you choose a less desirable location, you may have trouble finding tenants and may end up with lower returns.

The best choice is usually a property that is in a high-traffic area with good access to transportation. This is because businesses want to be where their customers are, and they want to be able to get their products or services to them easily. 

With a prime location, you’ll have an easier time attracting tenants and keeping them happy. Additionally, your property will be more valuable and easier to sell if you ever decide to do so.

The Condition of the Property Matters

The last thing you want when investing in commercial property is to pour money into a property only to find out that it needs major repairs. The condition of a property can affect your investment success in many ways. 

First, it can affect the amount of rent you can charge. If a property is in poor condition, tenants will be less likely to want to live there, which means you’ll have to lower your rents to attract them. 

Second, it can affect the value of the property. A property that needs significant repairs will be worth less than a property that doesn’t need any work. 

Finally, it can affect your operating costs. A property that needs frequent repairs will be more expensive to maintain than a property that’s in good condition.

The Right Tenant Mix Can Boost Your Investment

Tenant mix refers to the types of businesses that are renting space in a given property. For example, a shopping center with a mix of national tenants and local businesses may be more desirable than one that is solely occupied by local businesses. 

The reason for this is that national tenants tend to have deeper pockets and are less likely to default on their leases. As a result, they can provide a steadier stream of income for the property owner. 

Ultimately, the best tenant mix will depend on the location and type of property, but it’s always important to carefully consider this factor before making an investment.

Always Check the Cap Rate

The cap rate is a key factor that a property investor needs to understand before they invest in commercial real estate.

Simply put, the cap rate is the rate of return on an investment property based on the income that it generates. In other words, it tells you how much profit you can expect to make from your investment. 

A higher cap rate means a higher return on your investment and vice versa. Therefore, when comparing two investment properties, all else being equal, the one with the higher cap rate is usually the better choice. 

Taxes Are an Important Factor

Commercial real estate is generally taxed at a higher rate than other investments, such as stocks or bonds. As a result, it’s important to factor this into your overall investment strategy.

For example, if you’re looking for income from your investment, you may want to invest in properties with lower tax rates.

Learn Your Financing Options

Commercial real estate investors should understand the difference between debt and equity financing. Debt financing is when you borrow money to purchase a property, while equity financing is when you use your own money or invest money from others.

It’s also important to know the different types of loans available and what each one entails. Each type of loan has its own terms and conditions, so it’s important to choose the one that best fits your needs.

In addition, consider the interest rate when choosing a loan. The interest rate will affect your monthly payments, so you’ll want to choose a loan with a low-interest rate if you can.

Lastly, you need to have a clear exit strategy when taking out a loan. You’ll want to know how you’ll be able to repay the loan so that you don’t end up in default.

Get It Right When Making a Commercial Property Investment

When you’re considering a commercial property investment, factors such as the location of the property, the condition of the property, the tenant mix, the lease terms, and more. By understanding these factors, you can make a more informed decision about whether or not a particular investment is right for you.

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