Real estate is a good investment and a great way to diversify your portfolio, and commercial real estate often provides higher rewards than residential investment. For example, leases typically last longer and rental fees on leases consistently increase by up to four percent each year. In addition, your tenants are cleaning and maintaining your properties. These are a few tips to help you purchase commercial properties.
Learn the Local Market
Gain extensive knowledge of the market you hope to invest in. This will require extensive research. Other local investors are great resources. However, you should also seek out reputable local commercial property companies and realtors. Learn about local regulations and any unexpected costs.
You should also evaluate local needs and current trends with regard to commercial leases. Learn about the area’s demographics. For example, evaluate traffic flow, parking and location. Spending potential should be based on the socioeconomic status of the residents.
Focus on Return on Investment
As with any investment, you need to calculate your return on investment before purchasing any property. Look at current and future gross yield, or how much you can make on the lease each year. Gross yield is calculated as annual rent divided by total property value, while net yield is calculated as annual rent minus expenses divided by total property value. Net yield gives you your return on investment. You should seek a net yield of seven percent to 10%.
Do Your Research
Thoroughly research any property you are interested in before you invest. You may think a property ticks all your boxes: it has a great return on investment, the price is right, it is the type of property you were looking for and it has a solid rental history. However, extensive research may uncover a lack of maintenance or structural damage that you will have to fix as soon as you purchase the property.
You should also learn how local real estate transactions are conducted. To estimate the price the property sold for previously, find its registered deeds. Look for liens on the property and determine whether the sales price will pay them off. Tax receipts, building approval and leasing documents should also be reviewed.
Fix Your Finances
You need great credit and financial status to gain funding for commercial real estate projects. Therefore, pay down your debt and improve your credit score. Also, find out how much you can qualify for by speaking with banks and private lenders. Review the tax implications with a local accountant or financial advisor.
Although it is time consuming and often costly, make sure you are prepared for your first commercial real estate purchase.