Investing in commercial real estate is a tricky deal. However, commercial real estate investments can be made easy with these golden rules. Take a look:
Location holds great significance in commercial realty investments, since both rent and capital appreciation are heavily dependent on the location. Search for places where vacancy percentage is less. This means that tenants are less likely to vacate, leading to higher rents and capital appreciation.
Quality: B, B+ OR A
Two might be in the same location but differ in rent rates. Reason? Quality. The one boasting better quality will always get rented first and at higher price. It will also attract better quality of tenants. Needless to say it will fetch the investor better tenant retention and higher capital appreciation. State-of-the-art properties are liquidised and are higher in demand.
Demand and Supply
Demand and supply are one of the initial things a savvy investor should analyze before buying a commercial property. A disproportionately more supply would have negative impact on both new and old buildings. New buildings would receive lower rents, as tenants would have plenty of options.
Market rent and in-place rent
Always choose the property whose in-place rent is the closest to the market rent. It is the safest investment as the tenant is least likely to vacate the property. Tenants with higher in-place rent will most likely renegotiate their rents or not pay the escalations when they become due.
Commercial lease strictures are very different from residential ones. They are structured as 3+3+3 years or 5+5+5 years, meaning 9-year or 15-year lease with escalations every 3 years or 5 years. They are also one-sided. The tenant can vacate at any time whereas the landlord cannot ask them to leave for the lease period. There can also be a lock-in period (usually 3 years) during which the tenant cannot vacate the property. While analyzing an investment, the investor should first know how the lease is structured and take the inherent risks in account. Longer the lock-in periods are usually beneficial for the investor.