Investing in commercial real estate is generally an exceptional way to diversify your existing portfolio, creating additional tax breaks and, of course, boosting your net worth. Commercial property is not simply limited to retail space; it includes such investments as land, industrial warehouses, business parks, hotels, movie theaters, supermarkets, shopping centers, etc. While these types of investments can certainly pay off handsomely, it will require you to spend time researching, educating yourself on the risks and benefits as well as seeking expert advice from other investors.
Investments in commercial property tends to vary from single family residences because the net income tends to be quite a bit higher and because commercial tenants tend to take out much longer leases than the typical 6-12 month lease spans you will find in the residential real estate market. Further, covenants associated with commercial lease agreements are, as a rule, much stronger than their residential counterparts.
We mentioned homework before, so let’s explore the type of things you must assess honestly. First, your leverage will be a critically important factor going into the actual deal. Is there a tenant in the building you are currently considering purchasing? If so, when does their lease expire? While it can be wonderful to show lenders that the property is already producing income, but if your income is likely to cease shortly after the purchase, this can be a challenge.
You will also need to assess the financial strength of the business currently leasing the space, because this will have a huge impact on the company’s valuation. Are they likely to be able to continue paying the rent? (Is the business itself struggling, or is the entire industry on a major downward spiral?) For example, leasing to a government agency is desirable because of their tendency toward steadiness in this area and for the potential for long-term lease agreements.
Consider, too, the fact that multi-unit commercial space lowers your risk over a single-unit space, adding to your leverage. Owning a space with one tenant means that when that tenant leaves your building does not produce income until you can find another suitable tenant.
As with all properties, residential and commercial, it’s about location, location, location. Assess how accessible the building is. Are there major roads leading to it, or public transportation available for the location? If you are purchasing industrial warehouses, you will probably lease to tenant (at some point) who utilizes large trucks to carry freight, so highway accessibility is critical. Ditto for retail spaces, but be careful about the purchase of single shops if larger, multi-store complexes are planned in the future.
Experienced investors are often willing to share their advice once you’ve done your due diligence. Although it will take some time and effort, the right commercial investment can provide a financial boost for years to come.