- November 21, 2017
- 0 Comments
Making the transition from investing in single family residences to commercial real estate is a great opportunity to increase your cash flow, expand your portfolio, and to potentially create massive wealth for yourself. Having a basic understanding of how the two markets differ can help to ensure that you make a great commercial investment that you can feel good about.
Know What Commercial Real Estate Is
Commercial real estate is used solely for business purposes. In each case, the square footage of the property determines the value. Income accrues off of these properties by collecting rent from one or more occupying businesses. Just as residential real estate refers to single family units, townhomes, and condos (to name a few), there are also several different types of commercial real estate that you might want to consider before making an investment. You can consider retail space, office space, industrial space, multifamily housing buildings, warehouses, mixed-use buildings, medical centers, hotels, farm land, and garages as good examples of commercial real estate. Take a deeper look into any commercial real estate opportunities that hold interest for you and get clear on what makes them different from one another. Knowing the nuances of your chosen market will keep you well-informed as you move through the investment process.
Crunch Your Numbers
Although this may seem obvious, commercial real estate can come with some overhead costs you may not have considered. Running operating expenses on a commercial property might include repairs & maintenance, janitorial or cleaning services, real estate taxes, insurance, administrative costs, utilities, grounds maintenance, et cetera. Get clear on your potential NOI (net operating income) on the property. You can determine this by deducting any operating expenses (mentioned above) from the gross income you stand to make off of the rental income. Properties giving a positive number should be considered for investment.
You will also want to ask if there are already existing tenants in the space. If not, how much more rental space do you need? The amount of time it may take to fill it is another good question. The answers here may directly affect the overhead costs.
Make Sure You Assess Your Property
What are the needs of the current market in the area that you are looking to invest in your commercial real estate property? Is dropping a strip mall in the middle of a rural area a great idea? Maybe…if there is a demand for the type of services you may be able to offer there. Making sure that your space will serve the needs of your local population is a key component to ensuring success. If you’re not sure on this, get familiar with the history on the property. A high business turnover rate indicates that the location isn’t ideal for this type of property.
Assessing your property also relates to the physical building itself. When walking through the space, act like a detective. Look out for damages, leaks, and any other possible repairs that may need attention in future. Understanding your potential risks prior to purchasing can help you to avoid costly mistakes down the line.
A comp is a similar commercial real estate property that has sold in the recent past. Becoming familiar with these will help determine the current market value of your potential investment. Remember that the value of commercial real estate is determined largely by the square footage of the space available. Include comps which are within ten percent of the square footage of your property. Also research to determine whether or not there are plans for any future development in the near areas. This will help you to understand potential income growth in the future.
Looking to Invest in Commercial Real Estate in Baton Rouge?
If you are looking for commercial real estate investment opportunities in or around the Baton Rouge area, let SVN | Graham, Langlois & Legendre help you in your search. With our team of dedicated advisors working around the clock with the entire brokerage community, we are motivated to get you the highest return on your commercial real estate investment. Search through our properties today and reach out to us to get started.