In Commercial Real Estate (CRE), it’s important to know the ABCs of investing.
Whether it be multi-family, office, retail or industrial, commercial properties are complicated to understand, sensitive to market fluctuations, challenging to valuate and, at times, hard to fill with long term, trustworthy tenants. For CRE investors, having the ability to identify the good from the bad and the ugly deal is the key to achieving success.
Here are 5 things you should look for in a good commercial investment:
The property generates returns
The perks of CRE investing are quite apparent if you land the right deal. Ideally, your property should generate regular returns. Regardless of sale, cash flow is dependent on the property. “This is an extremely important trait, as it allows the investor the ability to have greater patience through recessions – since they don’t rely on the sale of the asset for income – as well as give greater security in covering problems that may come up along the way,” says CREUniversity.com.
The property appreciates in value
Even more important than cash flow is value appreciation, says CREUniversity.com. The value of commercial properties relies significantly on rental rates, which incrementally go up over time. Inflation also drives the cost to develop new properties and the value of existing real estate increases in conjunction with growth. According to Statista, $74.24 billion U.S. dollars was invested in CRE construction in 2016 — that’s up from $62.52 billion in 2002.
The property draws a large number of tenants
Properties that allow investors to avoid costly vacancies are preferable. Multi-family properties, for example, often have a capacity for hundreds of tenants so investors are solely relying on one party for rent. Instead, if one tenant vacates the impact is minimal.
The property allows lengthy lease agreements
Commercial properties tend to lend well to longer leasing contracts in comparison to residential properties. In many cases, leases are years-long commitments.
The property provides you with a tangible asset
“Real estate is not the same as buying shares in a company that may be here today and gone tomorrow,” says CrowdStreet. “Real estate is an asset class that investors can literally touch and feel.” CRE investors diversify their portfolios by investing in commercial properties. While tenants may come and go and the value of the property fluctuates based on market conditions, the property is a hard-and-fast asset that won’t go away anytime soon.