Commercial Property Investment Fundamentals
If you have invested in residential real estate, you understand the benefits of these investments. However, commercial property investment requires that you take your analysis to another level. Although the income potential is greater, so is the risk. Therefore, these are some things you should know.
Financing Commercial Real Estate
Commercial property financing differs significantly from residential real estate. First, due to the increased price, you often need investors with high incomes or greater net worth than residential purchases. Be prepared to pay higher interest rates, but your amortization period can also be extended, which can lower your payment. However, as this rate increases, so does your interest rate.
You may also gain financing based on the current lease on the property, and you may pursue alternative financing based on the type of property you purchase.
These properties are similar to residential properties, but they are considered commercial. The main goal of multifamily properties is increased cash flow. These properties also tend to have low expenses compared to the rental income you can earn.
Ideally, you will purchase properties that don’t but have significant potential to have high occupancy. You want tenants who continue to lease your apartments for years. Regular maintenance is necessary, and it may be expensive if the building has not been maintained properly over the years. In addition, strong investment properties may need internal and external updates or renovations. However, your management responsibilities will exceed those you would experience in other commercial properties.
Triple Net Leases
If you purchase other types of commercial properties, such as retail space, warehousing or office buildings, you have additional lease options. For example, the triple lease option allows you to take a relatively hands-off approach to maintenance and building management. Often, the tenant takes care of this. However, instead of paying you a set rental rate, they often pay property taxes, maintenance, utilities and insurance. Your tenant may also pay rent, but it may be lower. However, your risk as an investor tends to be lower as well.
Financial Analysis of Potential Properties
Commercial properties have proformas. These financial analyses include the gross revenue of the real state, its vacancy rate and the cost of operating it. You should also understand the debt service, which is your payment amount less any operating expenses. Calculate your net operating income, cap rate and return on investment.
These are just a few things you should learn about commercial property investment. Do your due diligence and research before investing in your first property.