Things to consider before investing in commercial real estate
It looks that commercial real estate can be the most profitable, but all things including risks needs to be considered before choosing this type of investment. Because:
· Everything takes longer
This is based on comparison to residential investment. It takes not just days but months, sometimes a year. You will have to find new tenants. Build or do the renovations. Advantage is that the leases are longer too. Patience it is the most important thing here. Just after longer time you will be able to see the results.
· Know the market
As an investor you must know where you are putting your money in. Learn basics and specifics about the market, every piece of information is going to help you along the way. Do a research in these aspects of the specific market that you are investing in – competition, vacancies, rents, legal implications.
· Trends and Area
Learn about the neighborhood or find a local broker who knows the area. He will be able to tell you about history and any existing plans.Important things of the district are environmental law and civil engineering because in different places it depends on different factors and helps with investment.
· Risk assessment by properties
Commercial properties risk assessment depends and varies based on the property type. Two residential properties built together won’t influence the success of one another. But two banks or hair salons can be difficult to manage. It would be constant war by attracting customers, it is important to understand these kinds of risks.
· Avoid failing business models
By now you should know that businesses are migrating online, a good example are the clothing stores. You need to assume that on some point they are going to stop renting the property. Be prepared for that, have insurance which covers this aspect. Search for failing businesses and do your best to stay away from them.
· Bureaucracy- you will need that
Learn or write down the working hours of all city jurisdictions, because you will have to visit and call all of them couple times per week. It is going to take you months to receive a building permit and more months after that for other authorizations.
· Market trends impact on demand
It is important to know the dynamics of commercial real estate. For example, of you are thinking to invest in office buildings have in mind co-working trend or how telecommutingcan impact the demand for the space in the market.
· Be active
Don’t expect to just to pay money and watch everything from the side. Investors who succeeded the most were always active and present. They implemented processes and systems to ensure that investment is using its maximum potential. Also, constantly checking on the development and local market situation.
· CRE Debt
There is a way to invest with lower risk and greater return than owning a property. It is doing that through investment in CRE (commercial real estate) debt. Your returns will reach from 8 to 10 percent and stronger standing than owning a property when market correction happens.