Buying commercial property as an investment can bring you big returns, but it can also bring you big headaches – and possible disaster – if you go into a deal with your eyes closed and inadequate knowledge.
Here are some things to keep in mind if you decide to invest.
Don’t over-borrow: Some investors think it’s wise to start out with a lot of equity in a piece of commercial property, forgetting that the interest rate on a larger loan may offset potential income from the property. Borrow only what you need.
Pay attention to details: Don’t rush in simply because you really like the property. What’s the capitalization rate likely to be? (Cap rate = what you paid for the property divided by income earned from it. For example, a $1 million dollar building that generates $100,000 a year in rent gives you a $10% cap rate, which is typically the lowest percentage you should be comfortable with.)
Other things to look at include closing costs; any repairs or replacements that you know will have to be made; known plans for other buildings, construction, new roads, etc., in the general vicinity that could affect the operation or profitability of your property.
As to the condition of the building, you can’t go too far in assuring you know exactly what’s happening on the inside and in the “invisible” areas of the structure. Have the building appraised and inspected by the appropriate professionals. They’ll be able to tell you what you can’t see that could seriously hurt you down the line.
This last one seems obvious, but many impetuous buyers purchase properties that are simply useless for the business or function they plan to run in them. Why? Because while the building itself may be awesome and all the other check-points get a thumbs up, it will never turn a profit in its location.
Thorough market analysis will help to avoid this problem. For a buyer who wants to operate a business, if you’re buying a little café in which to sell your delicious fried chicken and there’s a KFC a block and a half away, you might run into trouble. For a removed investor, if you buy a property that’s suitable only for types of businesses that already exist in great numbers in the area, you’ll have a hard road.
As complicated as some of this may sound, the good news is, your Realtor can help you steer clear of commercial property investment mistakes and point you in the right direction. Find a good Realtor (Nick and I are good choices!) and let them help you make the best decision.
Ask questions. That’s what you Realtor is there for.