Creating a good investment portfolio is as important as getting a health insurance. Real estate is an important component of a good investment portfolio not only because of its possible high returns but also because of its associated pride of ownership. However, return on investment may vary with different real estate options. Both residential and commercial real estate respond differently to situations.
A commercial property could be a small shop in a neighborhood, housing complex or a mall, a small office space, or even a joint investment in a bigger office space. However, before buying a commercial space, each of these options need to be studied from the point of investment amount, returns, exit options and associated risk.
Here are some tips one must consider before making a purchase of commercial property.
Know your Requirements
The first step towards purchasing commercial real estate is knowing your own needs, your financial situation, and what it is that you are looking for from the property. Some important points to consider when choosing a commercial property include the kind of property one is looking for, whether the commercial space is to be used for your own business or for rental purpose or simple for building equity. What is the preferred location of the property? Would leasing instead of buying be a smarter decision for your business? What is the financial situation of your business? Will you need a for loan? Take into consideration your risk tolerance, the amount of time to commit to the property while waiting for returns, whether to hire a property manager and whether the size of investment is worthwhile.
Understand the Technical Terms Related to investing in a commercial property
There many technical terms in real estate business that may sound intimidating to a buyer. Make yourself comfortable with these terms to have complete clarity on the deal you are getting into. Terms such as Loan-To-Value (LTV), i.e, a ratio of how much money one is asking from a lender vs. the total value of what one wants to purchase, Debt Service Coverage Ratio (DSC) – Operating income over total debt service which indicates how much of the debt one will be able to cover each year with his income are thrown around quiet often during a typical property deal. Other terms such as Capitalization Rate Cash on Cash, Vacancy Rate, Usable vs. Rentable Square Feet will all come handy when dealing with a commercial property. For instance, Rentable office space means the usable square feet of the office space plus a pro-rata share of building common areas. A commercial property in Kanpur Road can have usable square feet of 900 sq ft while the rentable square feet can be 1050 sq ft,
Compare Properties and Obtain Expert Advice
Before buying a commercial property, consider and analyze different options. Figure out what works and what doesn’t work for each property against parameters like price, location, condition, and allowed uses. Location is an important parameter for comparison. Commercial properties located near universities, hospitals, or downtown areas will generally have a higher value and sell more quickly. Some checklists for analysis include the rental income the property can generate, the taxes to be paid, the amount of maintenance or repair required, the reason the property is being sold by the owner, and what are the major upcoming changes in the locality. Making this analysis could be a complex process. It is therefore advisable to hire experts for guidance. If the property is more complicated, one may even need help from tax experts, accountants, lawyers, notaries, appraisers, engineers, or environmental specialists.
Evaluate your Budget and Financing Strategy
Before making a commitment to buy a commercial property it is important to evaluate your budget. Estimate how much down payment you can make, how much loan you can avail and in how much time you will be able to repay the loan. You may need some expert advice on financing your purchase including what type of banks, credit unions or home mortgage options you can use, what kind of credit you have and what kind of interest rate the banks will offer. There could be more than one way to finance your commercial real estate purchase. It is necessary to understand and evaluate all the options.
Finally, the buyer is often given a time period for due diligence which should be used to make sure that all the documentation about the property is correct. This is where you can check that everything the seller told you about the property is true including service/utility contracts, surveys, environments reports, rent rolls, covenants, restrictions, and other aspects of the property. If something is found wrong during inspection of the property, you can immediately ask your bank to cancel the transfer of funds.