Meta Description: Before investing in commercial real estate, there are several questions you need to ask yourself to ensure that you get better returns for your money.
Investing in commercial real estate is considered as one of best ways to grow your net worth. However, it is not as sure-fire as you might think. A lot of investors have failed because they did not do enough research before going into commercial real estate investing, which is quite complex in itself. This is partly because there are different types of commercial properties to consider and these include retail, office, industrial, and multifamily, among others.
When you also invest in commercial properties, you need to know that there are several class types for each asset class, and these range from Class A to Class B to Class C properties. These are basically based on whether they are located in primary, secondary, or tertiary markets. You can also decide to be the kind of investor who’s passive or active, which requires more resources and time.
So, you need to make sense of what investment strategy will work best for you. To help you make this decision, you need to begin by asking yourself a number of questions and what follows are some of them.
Are you qualified to invest in commercial real estate?
You should establish whether buying commercial properties is really the wisest financial decision for you to make. You need to know whether you are actually qualified to become a commercial real estate investor. This is not just about having basic understanding about this endeavour, but also about whether your earnings are enough for you to invest in bigger properties.
Is it the best time to invest and do you have the time to deal with it?
Time is very important in investing. It is not just about knowing market conditions so you could time your investment just right. It is also having the time to take care of your investments yourself. Whether you intend to invest in an office or multifamily building, you will need the time to find the right one for you, research on it, renovate it, and market it. You will even need more time during the processing of lease.
Is there a continued demand for the property you are interested in?
Keep in mind that there is a difference between simple demand and continued demand. When you invest in commercial real estate, your target will be a particular demographic of tenants. This will make it more straightforward for you to assess demand. Looking into this will ensure that you have an investment that will retain its attractiveness in the long run. This way, you can be sure to grow your potential for capital growth, sustain yields, and even get yourself a chance for a graceful exit should there be a need.
Is the property location in a good area?
This is one of the crucial factors you need to consider before investing in any property. Location is always a key factor in any good investment. However, you have to understand that what might be a good location for residential real estate may not be the same for commercial real estate. Because of this, you will need to do a lot of research to see if a location can indeed bring in high occupancy and profitability.
Aside from selecting the best city for your investment, it is also vital to make sure that the development positioning within that city is appealing. You will also have to consider the various factors that could affect the different sectors of real estate within that area.
Can you trust the developer?
This is another important factor you should think about thoroughly when investing in commercial real estate. Remember that no matter how good your location may be, if your developer is inexperienced or prone to using substandard materials, then the property may have limitations when it comes to its potential for profit.
The yields available in the CRE industry have drawn in a lot of inexperienced developers that you must avoid at all cost. To be able to do this, always make sure to check the track record of these developers, especially in the same sector you wish to invest in. Doing this will let you know of the performance of their past developments and will allow you to assess if you want to invest in them or not.
Does the property fit within your investment objectives?
There are two key security elements in investing that you must never overlook, and these are how well your investment suit your objectives and its possible place within your existing portfolio. Keep in mind that what might work well as an investment for
another may not do well for you. Diversity is very crucial and there are tons of commercial properties that will allow you to gain good yields without the need to invest a fortune.
What are the possible risks you might face?
For an investment to be successful, you have to understand and know how to mitigate risks. You have to ensure that your contracts are strong and backed by assets. It is best if you stay away from developers that underwrite their guarantees through third-party shell companies as they usually have zero assets. This will make for quite an insecure investment.
When it comes to knowing and understanding risks, it is always best to think about the worst-case scenario. Ask yourself what impact it may have on your portfolio and the possible measures you can take to protect yourself from it.
Do you have an exit strategy in case things go sideways?
Aside from knowing the risks, you also need to know and set an exit strategy in case things go bad. Putting a flexible exit strategy in place is vital in investing in commercial real estate. Although the sustained demand of your property is a major factor in this, the conditions you agreed to for your specific investment will also greatly influence it.
If you are guaranteed long income periods with highly profitable yields, this will help you ensure a flexible exit strategy for your investment. This will provide you with the opportunity to make a graceful exit from your investment while still giving buyers an attractive and fully operational development with a proven record.
Asking yourself the questions mentioned above as well as many others can help ensure whether the commercial real estate you are planning to invest in is profitable and secure. The most important thing, however, is knowing when to ask for help and asking more questions from professionals. Remember that your investments will only be secure if you have full understanding of them and this will take asking more than just a handful of questions.