Editor’s note: This guest post offered by Sachin
This article covers the basic processes for investigating commercial property investment options
Commercial property investment can be an excellent investment opportunity, but it can bring with it more than a few problems. If you’re buying commercial property, you’re also making a major capital investment, and the risks start before you even pick up the phone. New commercial real estate software and property valuation software are now being used by professionals as risk management tools as much as anything else.
Operating costs for shops are also very high. Some shopping areas are particularly expensive and can’t attract or keep tenants.
This is a classic investment trap- The building owners have to charge high rents to maintain their own cash-flow, which is often debt-related. These are very tricky situations, and if you go into commercial property investment, you’ll find that “market forces” can be like hurricanes. They can blow your money away.
Stage 1- Key factors in commercial property investment
The main issues in commercial property investment are:
– The commercial environment- Is the shopping area viable, and attracting a lot of customers? If so, it’s a working proposition. If not, avoid like the plague.
– Access and transport- Something as basic as parking can trash the values of commercial properties. Being away from public transport is another possible problem, because people tend to do their shopping during their commuting.
– Area economics- Every area has a different economic profile. The location of the property is a major issue. Big malls and warehouses can operate out in the sticks, but smaller scale commercial properties simply can’t. Unless you’re buying in to a new development in a new area like a new housing estate, commercial buildings need local demand.
– Competition- Many investors don’t seem to realize that commercial property operations are highly competitive. You’ll do better without a lot of heavyweight competition like malls and major shopping centers, which attract the vast majority of consumers.
– Condition of premises- Most commercial properties are in various states of repair, from horrendously dilapidated to good. This is a major area of focus for investors, because the costs of renovation can be almost as high as rebuilding.
Stage 2- Checking out commercial property values
If you’ve found a property that passes the quality test outlined above, the next stage is all about number crunching. You need to see an investment price that will lock in a good return. This means factoring costs, as well as your purchase price and establishing realistic values.These values are measurable, using your return on investment (ROI) as a benchmark.For example:You’re buying a commercial property including shops and rental accommodation.- You have two revenue bases here.- You’ve pinned down costs to a definite figure.- You need to see returns over costs on a margin of 20%.
Can you realistically expect to get that ROI?
These are the real property values for investors. Never mind the hype, focus on what the investment can really deliver. The rest is easy.
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