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!
Get familiar with commercial 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 remodeling 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. It’s advisable investors try their hand at residential properties prior to 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. 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 investment:
•Conduct market research: Before investing in any commercial real estate, conduct a large amount of market research on both the current and forecasted state of affairs in your targeted investment 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 be in need of 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 are able to 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.
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!