Things To Consider When Investing In Commercial Real Estate
Commercial real estate can offer high potential for lucrative financial returns over time. But investing in commercial properties is very different than investing in residential real estate, and accordingly, the criteria that go into making any investment decision are different. Here are a few things to consider if you’re looking to purchase commercial property.
What Type of Commercial Property Will You Purchase?
There are many types of commercial real estate, and it’s worth doing a thorough survey of potential investments prior to any purchase. This includes learning about characteristics of each type of property, as well as seeing in-person examples of each.
Commercial property typically includes office space, warehouse space, retail space, multifamily real estate space, and other properties that don’t fit into preceding categories. Each type comes with particular characteristics, as well as unique regional attributes.
If you own a small retail business and are looking to invest in commercial property, one of your first thoughts may be to purchase the property in which your business is located. This will give you great control over your own physical space, as well as more say in adjoining tenants (not to mention, additional income streams in the form of rents).
If you’re a wealthier investor looking for steady and reliable rental income, you may be interested in office real estate. Many office tenants (and commercial tenants generally) tend to sign long leases that are quite stable over time, ensuring reliable access to funds.
How Will You Fund Your Purchase?
Commercial properties are usually more expensive than residential properties. Loans are also structured differently: they tend to be shorter-term, and to have higher interest rates. Consequently, ensuring you’re prepared to repay is essential for a sustainable commercial investment.
There are a number of factors to consider as you seek lending options, including the following:
- Will you attempt to secure a loan as an individual, or an entity?
- Are you aware of and comfortable with any origination fees, which may be quite high?
- What is the debt-service coverage ratio of the property you’re looking to purchase?
- Will your credit be prohibitive in allowing you to secure a loan?
These and other questions are best reviewed with a financial professional, to ensure you’re prepared for the high costs of borrowing.
In short, commercial real estate can be a complex and often expensive investment. It can also be quite profitable in the long-term, and so ensuring you understand the ins and outs of any investment and are prepared to pay it off will help you make a sizable profit in the long run.