5 Things You Should Know Before Investing in Commercial Property
Are you trying to find out how to invest in REITs? Investing in commercial real estate can be tricky. That’s why real estate partners often times will buy investment homes instead of trying to go the business route. However, if you want to buy commercial property, then here are a few things that you should know.
You should know what commercial properties are.
Commercial real estate properties are the buildings that are leased out to businesses and companies as work spaces and offices instead of an actual living space like a home. You should already know this if you have already decided to invest in it, but we’ll cover the basics. It can include anything from buildings to strip malls, restaurants, factories, retail stories and various other shops. Generally, these properties are sold as a single building; one office, one restaurant, one store and so on. But, if the developer is planning on expanding their project or wants a quicker return, the whole project can be broken up into multiple units instead of being sold as one.
You should know the advantages to commercial real estate.
They have incredibly attractive leasing rates. One of the best things about investing commercially rather than in residential properties is that the monthly cash flow is much higher and can have very high returns. The reason for this is that the rental rates are typically priced on a per square foot basis. So, the more square footage you have, the higher the rent can be.
Another advantage is that you can work out at longer lease with residential homes. Residential leases tend to be very short term but a commercial lease could go up to ten years and more, depending on the agreement. But they are also at least one to five years long. This makes for a very stable cash flow if the owner can find long term tenants.
You should know the disadvantages to commercial real estate.
Probably the biggest downside to investing in commercial real estate is that it comes with a lot of rules. There are a lot of regulations involving taxes, purchasing, maintenance and more. All of these things change depending on the state, county, zoning, size of building, industry type and various other things. If you want to be an investor, you’ll will need to have a lot of knowledge of the legalities or have people on your payroll that do.
Another disadvantage is that there is a different kind of risk with each tenant. With a home, the needs and requirements of the tenants are basically all the same. They need the same kinds of rooms and facilities. However, a commercial building could have an entirely different kind of business each time. One tenant could be a hair salon, in need of a reception desk and stylist stations, whereas the next tenant could be a retail store that needs changing room and check out counters. The cost of renovations needs to be worth the turnover rate.
You should know if you are the type of person who should invest.
In order to be a good candidate for investing, you need to have a lot of knowledge regarding the industry or you should have people on your payroll that do. Generally speaking, these are not first time investors and are likely to be quite wealthy to start with. However, because of the wide range of properties available, you could probably handle single shop buildings or smaller warehouses without having to have a ton of money. You just need to ensure that you are going to be able to take care of the costs that are connected to commercial real estate as well as have the time to handle it all.
The main issue to consider is the supply and demand. So when asking yourself, ‘Should I invest in property?’ if it’s purely an investment, keep this in mind: the best kind of property is one that located in a place where there are not a lot of vacancies in nearby stores and even the space that is available for up and coming developments is fairly limited. Having a low supply and a high demand equals out to higher rental rates which is better for the investor.
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