The commercial real estate market is slowly starting to recover from the losses and blows it took as a result of the ongoing pandemic. If you’re thinking about purchasing commercial real estate, now may be the time to do it.
However, that doesn’t mean you want to rush out and pay the downpayment for the first available building you come across. There are a lot of things you should consider before selecting the best property for your needs.
As a matter of fact, you’re going to find quite a bit of commercial real estate available on the market right now. How can you narrow down your options and pick the right one?
Read on for the top seven factors to consider when purchasing commercial property.
First thing’s first: you’re going to want to narrow down your options by location. While properties in higher-demand locations are guaranteed to cost more, they’re also more likely to succeed. If you’re lucky, you’ll find a low-price property in an up-and-coming city, but accurately predicting these changes can be difficult.
A variety of factors can determine whether or not a location is going to be optimal for your business, including:
- Local public transportation
- Proximity of property to suburban neighborhoods
- Proximity of property to universities
- Presence or absence of competing markets
- Growing or shrinking population
At the end of the day, only you can decide on the best location for your business.
Whether you intend to run your own business or rent space to other entrepreneurs, you want your commercial property to be a solid investment. One of the best ways to think about your commercial property as an investment is to calculate the net yield.
In order to calculate the net yield, you will need to consider:
- The market value and/or property cost
- Cost of upkeep (which we will discuss later in more detail)
- Annual income secured as a result of purchasing the property (ie business income or rent)
The net yield is your annual income minus the cost of upkeep. If the cost of the property vastly outweighs the yield over years to come, it is not a sound investment.
Under almost all circumstances, purchasing commercial real estate is going to require funding. Not unlike purchasing residential real estate, you will likely need to take out a mortgage in order to close your purchase.
Securing funding will play a large role in the property you are able to purchase. Finding the right lender for your commercial real estate investment can be tricky–and lenders don’t always know how to account for what you need or how they can help. That’s why most people work with a commercial mortgage broker–discover more here about how a broker can help you.
4. Cost of Upkeep
As we mentioned earlier, thinking about long-term costs–like the cost of upkeep, aka your bottom line–is an important part of the deciding process. It’s always better to get estimates and think about these costs in advance, rather than finding out the hard way that your property is too expensive to manage.
Cost of upkeep includes things like:
- Maintenance and cleaning costs
- Renovation costs
- Utilities and internet capability
Remember, it’s not just the monthly mortgage payment you need to worry about.
5. Quality of Construction
The overall quality of the building will have a pretty big impact on your cost of upkeep. Is the property you’re eying move-in ready? Can you set up shop or start renting out office spaces right away?
Or is it going to take some serious work? Older or poorly-maintained buildings are almost always going to cost less to purchase but far more to maintain. If a building is falling apart or poorly constructed, it may not be worth the investment.
6. Potential for Growth
We hinted at this earlier, but what kinds of demographics can you find nearby? Is there a large pool of talented candidates you can choose from to staff your own business? Are there plenty of budding entrepreneurs who are pioneering start-ups that need a space to work?
How will things look in the future? You can’t always get an accurate read on how much a community will grow and prosper, but there are some signs that growth could be coming. Examples include:
- An increase in new housing
- The presence of universities
- Investment into schools, roads, and other desirable features
Another sign that growth is likely is an increase in employment opportunities. Growing cities are ones that have plenty of jobs available in a wide variety of industries.
Existing and future infrastructure can help you to understand the direction a city is going in and whether or not it’s the right place to buy commercial real estate. Government officials are constantly planning and/or executing infrastructural investments or changes that can help or hurt your future success.
It’s worth noting that infrastructural changes can also affect the value of the property you’ve purchased. No matter how long you intend to hold onto your commercial real estate, it’s always good to know that the value will almost surely increase over time.
Be Selective When Purchasing Commercial Real Estate
The commercial real estate market hasn’t seen quite as many ups and downs as the residential real estate market, and it’s slowly leveling out after a disruptive year. If you’re considering purchasing commercial real estate, make sure that you take your time. Don’t jump on the first property you encounter without knowing all of the facts.
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