In many markets, the long-term benefits of commercial tenants outweigh the elevated risks associated with commercial real estate. It’s important to have a robust, thorough understanding of the benefits before purchasing a commercial property. Here’s a quick guide to help you get started!
Table of Contents - A Quick Commercial Real Estate Investing Checklist
- Get familiar with commercial investing risks
- What to know about commercial real estate investment
- Commercial Investing Checklist
- Types of Commercial Real Estate
- Wrapping it up
- Commercial Real Estate Due Diligence Explained
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Get familiar with commercial investing risks
On its face, the process of investing in commercial real estate is largely like investing in residential. Investors buy properties and lease them to residents or tenants as a way of generating passive income. Renovations, redevelopments and other remodelling efforts can appreciate the property’s value, resulting in a high return on investment when you decide to sell.
In reality, there are several key differences potential investors should be aware of. Generally, commercial properties represent a larger investment than most single-family residential properties. This means that the investor is exposing themselves to a slightly larger amount of risk. Identifying and signing commercial tenants can also be challenging—especially in smaller markets or in areas with a glut of commercial real estate available.
Investing in commercial real estate requires a fair amount of additional research before engaging in any transaction. In addition to monitoring real estate industry forecasts, you should also be watching business growth forecasts for your targeted region. And, you'll need to be confident in your ability to attract, manage and maintain a long-term tenant.
What to know about commercial real estate investment
Commercial real estate requires investors to have a slightly more specialized set of skills, in addition to greater access to capital. Its advisable investors try their hand at residential properties before investing in commercial real estate. This is in large part because of the elevated risks associated with purchasing larger assets in business districts and other commercial areas.
There are many things you can do to ensure you’re making the right decision when it comes to purchasing a commercial investment property.
Commercial Investing Checklist
Here are just a few steps you can take to minimize your risk and ensure you’re going to reap a return off your commercial real estate investments:
Before investing in commercial real estate, conduct a large amount of market research on both the current and forecasted market analysis in your target market. You should have a clear idea of the direction of the local real estate market, as well as the local business and jobs market.
Consider your tenants’ needs
Before signing any tenants, you will have to carefully consider their specific needs. For instance, some tenants may need large, visible outdoor signage. Others may require noise protection, while still more may want an expanded commercial kitchen area. You have to honestly assess your ability to provide these amenities and services.
Know your zoning
Zoning can change, so it’s important to have an updated idea of the zoning for your commercial building. If you have people sleeping in a building zoned for commercial use, for instance, you could face stiff fines and penalties as the landowner.
Invest in technology
Modern office tenants require extensive technological integration at their places of business. If you want to compete for most commercial tenants, you’ll need to invest in the latest technologies for your building. For instance, you should pay for high-quality internet access and controlled access systems, as well as individual climate controls for each suite.
Consider your ability to act as a property manager
Do you possess the capability to act as a commercial property manager? While many investors can work as a residential property manager, most commercial leases are much more demanding. You may want to consider contracting property management tasks out. But be warned, this may take a significant chunk out of your potential profits.
Research your tax burden
The tax burden you’ll owe on your commercial real estate investment will vary from residential real estate. Consult a tax professional to learn more about tax laws in your target market and municipality. This is particularly useful if you’re planning on investing in a province with a complicated tax regime, like Quebec.
Types of Commercial Real Estate
When you invest in commercial real estate you have a few avenues you can travel.
These properties consist of multiple rental units that can be rented out to families to live in. A property with two or more units can be considered multi-family. For commercial purposes, a multi-family property will have 5 or more units.
Retail commercial properties are self-explanatory. This type of commercial property is companies open up usually to sell goods and services. A mall would be a great example of retail commercial.Industrial: Industrial commercial properties host numerous types of large companies from gas exploration to refining. These properties are usually on the outskirts of town and consume lots of lands.
Mixed-use properties usually combine retail and multi-family properties into one. For lending purposes 80% of the time these are commercial mortgages you have to apply for, however, some lenders will structure these as residential.
There are a host of different investment classes that we didn't touch on here. However, these 4 categories of commercial real estate cover about 80% of the total commercial investing space.
Wrapping it up
Conducting proper research and improving your tenant experience will help you create a commercial property that’s attractive and profitable. It’s important to understand, however, that commercial real estate investment requires extensive foresight, industry expertise and attention to detail. It’s not advisable for inexperienced or undercapitalized investors! With our commercial investing checklist you should be able to navigate the murky waters and create success.
Commercial Real Estate Due Diligence Explained
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