Commercial real estate properties are amazing investments that can frequently offer higher returns when compared to residential investments. Getting tenants can be harder, but lease tenures are longer and more stable. What’s more, lease tenures increase by an average of four percent every year, according to a recent report.
Although commercial real estate investments are attractive, they come with a variety of associated risks. Make sure to analyze the risks and make the right decision. Here are a few tips to help you out:
#1 – How to Calculate the ROI of the Property?
Check the ROI of the commercial property before investing in commercial real estate. The yield is the main number you have to pay attention to, and it is expressed as a percentage of the capital value. The gross yield is the income received before paying the expenses, and the net yield is the return you receive after the deductions are paid.
Most financial advisors focus on a net yield of 7 to 10 percent:
- gross yield – estimated annual rent/total value of the property
- net yield – (estimated annual rent – functional costs)/total value of the property
#2 – Understand Your Local Real Estate Market
Every real estate market is different. Make sure you understand the real estate market in your area before investing in commercial real estate. Do your research, pay attention to other investors, what they are doing, and how they are financing their projects, and check the local prices. If you are unsure, contact other real estate investors active in the area. See what they are working on or if they postponed their investments.
#3 – Get Your Finances in Order
Your finances should be in order before investing in a commercial property. These properties are usually more expensive than residential properties, so you will need adequate funding to complete your project. Talk to private lenders, banks, or private investors to get the money you need to launch your project. Keep in mind that banks will require many financial documents that show you have a solid financial background and are able to generate profits.
On the other hand, if you manage to get a solid partner, your chances of getting cash are higher. You can apply for a loan jointly, secured by collateral. Depending on your project, you may get preferential interest rates and attractive payback terms.
Don’t forget about taxes. The tax implications of a commercial real estate project can become quite tricky, so consult a financial advisor to guide you on tax matters. Rules and regulations differ a lot depending on the state you live in.
#4 – Look at the Demographics
Pay attention to the demographics in your area before launching a new commercial real estate project. The area has to be attractive, have healthy traffic, and must be easy to locate. After all, a commercial project must attract customers, so this aspect is critical. Also, assess the spending potential and living standard of the local population – are the people willing to spend money in a new commercial area? Are there a lot of potential tenants who want to lease office or commercial space in your new building? There are many things to consider; depending on the demographics in your area, you may want to introduce a new office building, restaurant, convenience store, or consultancy firm.
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