4 Tips To Help You Evaluate A Commercial Real Estate Investment
If you have made the decision to begin investing in commercial real estate, it is important that you carefully and thoroughly weigh your options. You want to gather a few potential properties and then weigh the pros and cons of each one. As you start to evaluate each of these properties, here are a few tips that will help you make a wise investment choice for the long-term.
Tip #1: Research the Local Market
When looking at a piece of commercial real estate, you need to know how that property compares to properties in the same market. To perform this type of market research, you need to tour multiple properties in the area, take notice of listing prices online, and become familiar of any industries that are up and coming in the area. This kind of information is invaluable when evaluating the value of a property and in negotiations, if you decide to place an offer on the property.
Tip #2: Estimate Income Potential
Commercial properties tend to have a six to 12 percent annual return, while residential properties have a one to four percent annual return. When evaluating commercial real estate, it is crucial to take this type of income potential into account. Don't forget to consider expenses that you will incur over time, such as maintenance costs. In addition, consider the type of lease that is most suitable for a property, how long a tenant may remain in the property, etc. since these things will impact potential income in the long run.
Tip #3: Know the Investment Risks
As you are looking at the potential earnings, don't forget to consider the ownership risks. Take a look at similar properties and look at average renovation costs, tenant turnover, etc. since these could potentially reduce your profit. Consider employees, customers, and other individuals moving throughout the building daily — the more people present within the building, the higher the damage risk.
Tip #4: Work with a Professional
While you can perform your own independent research, it is always recommended to be equipped with expert knowledge as well. Find a local commercial real estate agent to assist you through the investment process. He or she will help you weed through the properties to determine the ones that are worth your time, and he or she will likely have important contacts that you otherwise would not have access to.
If you would like to learn more about evaluating commercial real estate properties, contact a commercial real estate broker near you.