Evaluating Commercial Real Estate Investments

Date:

Gauge Rent Return Tax Benefits And Depreciation

3 Risk Factors You Must Know in Commercial Real Estate

As Melbourne-based property managers ourselves, we witness firsthand the importance of understanding your propertys location and developing your propertys lease agreement with these findings in mind.

We also recognise that there is naturally a lot more preliminary market research required to determine the best commercial real estate investing for you. As finding an ideal commercial investment property as well as during the process of finding an ideal tenant for that property. The payoff for this additional footwork, however, is the privilege of adding a commercial property to your investment portfolio.

There are numerous financial and tax benefits to owning commercial properties, including comparatively higher rental return rates for residential properties, as well as higher property and building depreciation allowances. Commercial property owners also maintain a greater level of control over their ROI as they possess the right to subdivide their property, redevelop the property, or even apply for zoning alterations.

Taking all of these factors into account can help you maximise the ROI of your commercial property, both in the short-term with regards to revisiting rental rates, as well as in the long-term through the development of a thorough depreciation schedule for that property.

What Qualifies As Commercial Real Estate

Commercial real estate is a property that is typically leased out for business and retail purposes. Investing in commercial real estate involves the purchase or development of properties that have been designed with the intent of housing commercial tenants. Unlike a residential real estate investor, commercial real estate investors lease out and collect rent from the businesses that occupy their properties rather than from residential tenants. It should also be noted that raw land purchased for commercial property developments is also included in this definition. Commercial properties can generally be categorized into five main types. Keep reading to learn more about each one.

How To Analyze A Real Estate Investment

Real estate is the world’s largest asset class, and for good reason: Its both capital-intensive and relatively accessible. According to Savills World Research, the value of global real estate reached an estimated $280.6 trillion at the end of 2017, making up more than 77 percent of the worlds wealth.

Real estate is often the primary source of wealth for individuals and the biggest investment many make in their lives. Consider the building youre in right now. It may be owned by a company or person to whom you or a business pays rent. It could be your home that you own or pay a mortgage on, or a hotel youre paying to stay at.

Because of its accessibility and history of high returns, real estate is an incredibly popular alternative investment option for individuals. But how can you get involved in real estate, and how do you know if a property is a wise investment decision?

To succeed as a real estate investor, you need to understand the four key factors to consider when analyzing a potential investment. Before diving into these factors, heres a primer on the five types of real estate and how to invest.

Access your free e-book today.

Read Also: How To Invest In Casino Stocks

How Does Commercial Real Estate Valuation Work

Knowing how to value commercial real estate properly is probably the most significant factor in determining whether or not to include it in your investment portfolio. The ability to accurately evaluate acquisition properties and your own holdings is a skill that every serious commercial real estate investor must possess- you simply cannot succeed in this world without the ability to determine the market value of a property.

Whether you’re an unseasoned greenhorn or an experienced investor with more than a few deals under your belt, a solid understanding of the best commercial real estate valuation methods is an essential ingredient for success in the world of real estate investments. I want to take a few minutes to give you an overview of the valuation process, as well as share some practical methods for creating commercial real estate valuations.

Get access to our FREE weekly newsletter exclusively covering the latest updates from the real estate crowdfunding world

Getting Started In Commercial Property

CW 606 FBF  Evaluating Housing vs Office Retail Commercial Real Estate ...

There are a number of ways to get into the commercial market.

In general, these require more capital than residential real estate and include:

  • Develop a new building from the ground up. It would be preferable if you can design it for a known end user who needs the office space.
  • Recycle an existing building for office use or refurbish an older office building and bring it up to date.
  • Purchase a section of a larger building that is zoned commercial as an office suite on a strata title or
  • Purchase an existing building with tenants on leases.
  • Don’t Miss: Hire Someone To Invest For You

    How To Evaluate Rental Property As An Investment

    If you are looking to make extra income from rental income, it is a smart idea to look into commercial real estate because it has a better rate of return compared to residential. There are numerous Denver commercial properties that may make good investments, but it pays to do your research. Before making any decisions, it is important to evaluate potential properties for income potential and associated risks.

    Investing In Industrial Property

    Many of these buildings now contain large amounts of offices as our industrial base has changed from manufacturing to more storage and distribution.

    Industrial buildings now house a range of activities from research and development space which requires a large component of office space to vacant warehouse space.

    In recent times industrial developments have sprung up in industrial parks where there is a large garden component and greater amenities for tenants.

    Tenants prefer to be situated in a cleaner, newer, better constructed and laid out premises.

    These buildings often have large column-free spaces with about 15-20% of the buildings space available as offices.

    The size of industrial premises can vary from small factories to large multi-hectare distribution centres.

    The smaller factories provide the average investor with an opportunity to get into the industrial sector at a relatively low cost.

    Industrial buildings can be classified into 3 broad categories:

  • Research and development
  • Warehousing or distribution
  • Many new buildings are purpose-built with an end-user in mind, but if you are building a complex speculatively, try and make the building design flexible so that potential tenants can have as much percentage office space as they require.

    Many small companies now require putting 25 and 50% of the building as office space.

    Read Also: Best Credit Card Company To Invest In

    Understand The Advantages And Disadvantages Of Investing In Commercial Real Estate

    Any type of property, whether it’s commercial or residential, can be a good investment opportunity. For your money, commercial properties typically offer more financial reward than residential properties, such as rental apartments or single-family homes, but there also can be more risks.

    Understand the full pros and cons of investing in commercial properties is important so that you make the investment decision that’s right for you.

    Look For Motivated Sellers

    How to invest in Commercial Properties: expected return, REITS and other details.

    Like any business, customers drive real estate. Your job is to find themâspecifically those who are ready and eager to sell below . The fact is that nothing happens or even matters in real estate until you find a deal, which is usually accompanied by a motivated seller. This is someone with a pressing reason to sell below market value. If your seller isn’t motivated, they won’t be as willing to negotiate.

    Read Also: Socially Conscious Investing Mutual Funds

    Underwriting Commercial Real Estate

    Analyzing and underwriting a commercial deal is far from the process used to review a residential property. There are numerous additional variables to consider with a commercial deal, though market factors remain crucial. Investors should take time to develop the right deal analyzer, including a quick way to determine if a property is worth a closer look. Many commercial investors utilize a gross profit percentage or capitalization rate formula as part of their analysis. Other variables, such as price per square foot or cash on cash returns, can be helpful to consider as well.

    In essence, underwriting commercial real estate is a great way to determine the profitability of a given deal with your financing, property, and market in mind. It is a good idea to create a spreadsheet to quickly calculate and record your numbers. As you analyze and tackle more commercial deals, you will find the underwriting process that works for you. In time, you can develop a foolproof system for deciding on the right investment properties for your portfolio.

    How To Evaluate A Private Equity Commercial Real Estate Deal

    The transaction sponsor is only part of the investment puzzle. The deal itself is just as big, if not a bigger, component of measuring an investments potential success as the firm running it. For potential investors, the first major consideration is whether the offering is in a fund or a deal. There are important differences.

    Don’t Miss: The Complete Guide To Real Estate Finance For Investment Prop

    Evaluating Fees Of A Private Equity Real Estate Firm

    A private equity commercial real estate firm puts a significant amount of time and resources into every real estate transaction. It requires a dedicated staff of underwriters, asset managers, commercial property managers, and support staff to coordinate transaction logistics and investor reporting. It is an administratively intense and costly effort. To recoup some of the costs associated with these activities, it is common for there to be private equity real estate fees associated with each investment.

    Fees should offset administrative costs. They should not be a profit center for the firm. To that end, investors should look for one or more of the following fees in an investments offering documents. The amount can vary, depending on the firm, but generally acceptable ranges are provided for each fee.

    Learn What The Insiders Know

    How to Evaluate Neighborhoods when Investing in Real Estate

    To be a player in commercial real estate, learn to think like a professional. For example, know that commercial property is valued differently than residential property. Income on commercial real estate is directly related to its usable square footage. That’s not the case with individual homes. You’ll also see a bigger cash flow with commercial property. The math is simple: you’ll earn more income on multifamily dwellings, for instance, than on a single-family home. Know also that commercial property leases are longer than on single-family residences. That paves the way for greater cash flow. Lastly, if you’re in a tighter credit environment, make sure to come knocking with cash in hand. Commercial property lenders like to see at least 30% down before they’ll give a loan the green light.

    Don’t Miss: Best Heloc For Investment Property

    Find A Property That Meets Your Criteria

    With everything in place, begin your search. By now, you should know your criteria stick to them. Remember why you are buying commercial real estate, and look for a property that can get you to the finish line. Remember, theres no reason to buy a property that doesnt help you realize your goal, no matter how good of a deal it may seem on the surface.

    How Do You Calculate If A Commercial Property Is A Good Investment

    Add all sources of revenue to the NOI, then subtract all expenses from that number. In general, investing in a property with a high NOI is preferable.

    The following is a summary of the facts about commercial real estate investment. The capitalization rate, or the commercial property cap rate, is a figure you can use to estimate how much money you can earn over the course of a year with a commercial investment. Property owners can expect to earn between 6% and 12% annual returns from their commercial properties. Long-term tenants can help you achieve financial stability in the commercial real estate market at times of high and low demand. Some commercial properties are more desirable and profitable than others, and thus not all are created equal. If one of the tenants leaves, the remaining tenants income will not be reflected in the investment. Investing in a property with multiple tenants is one of the best commercial investments.

    No Comments

    Also Check: Annuity Retirement And Investment Companies

    Evaluating 4 Useful Factors To Benefit In Commercial Real Estate Investing

    With inflation impacting interest rates and residential real estate prices across the face of Australia, many seasoned investors have been turning their attention towards commercial real estate investing. As the potential is rising, its never been a more perfect time

    With inflation impacting interest rates and residential real estate prices across the face of Australia, many seasoned investors have been turning their attention towards commercial real estate investing. As the potential is rising, its never been a more perfect time to enter the world of commercial real estate investing.

    As Melbournes real estate market bounces back from the COVID-19 pandemic, shrewd investors can find a high selection of commercial properties on the market today in a metropolitan Melbourne location that suits them best. In a nutshell, those who are in commercial real estate investing are spoilt for choice, which can be just as much of a disadvantage as it can be an advantage. How so? Because it can be tricky knowing exactly where to begin.

    Understanding what it means to evaluate commercial real estate investing and how these investments differ from investing in residential property can provide prospective investors with a strong foundation to help guide the development of their portfolios. But simply knowing the pros and cons of commercial real estate investing is half the equation.

    We will be discussing and evaluating:

  • Consider the propertys ownership and tenancy history
  • Evaluating Multi Family Opportunities

    7 Commercial Real Estate Terms You Should Know

    Condominiums, apartments and other multifamily structures may be first to come to mind when you consider what is commercial real estate. One central rule for evaluating commercial real estate investments is you want to think about whether you can commit the time, money and effort of your venture.

    Plan on thoroughly reviewing the buildings past financial records so youll be prepared for the operating costs. Your decision should factor in the significant benefit of capitalization opportunities on multifamily real estate youll be paying less per unit, so bringing in revenue quickly can potentially be easier.

    Also Check: Socially Responsible Investing Robo Advisor

    What Is A Commercial Property

    Commercial properties might refer to:

    • retail buildings
    • industrial buildings
    • apartment buildings
    • “mixed use” buildings, where the property may have a combination of uses, such as retail, office and apartments.

    There are nuances to managing each of these types of properties. To paint a general picture, let’s examine the pros and cons of investing in a single-story commercial retail building, such as a community “strip mall.”

    Investing In Retail Property

    When investing in the retail sector, it is important to consider how the emergence of online shopping is changing the way Australians do their shopping.

    At the same time, it’s important to understand how the retailing giants in Australia have now taken over the bulk of the retail market.

    With their increased purchasing power, they can afford to open longer hours and have put great pressure on the small retailer.

    Also, the face of retailing has altered in Australia.

    In the past, most of the successful retail chains were represented in the retail shopping strips. Now they are mainly in the large shopping centres owned by the listed trusts like Westfield and which have become something of an entertainment mecca for families.

    The strip shopping centres and corner shops have suffered as the big retailers have moved to these centres.

    Recently, as these large shopping complexes have become even larger, many shoppers seem to be returning to the strip shopping centre where parking is easier and there is less hustle and bustle. They also find the local retailers more personal.

    Another change is the trend to bulky goods centres those large warehouse-type centres that house retailers like Harvey Norman and other electrical or furniture retailers.

    These types of centres have increased the entry-level costs to snare a large major player as a tenant.

    But statistics show that 80% of small businesses fail within the first 5 years of starting up.

    Read Also: Using Home Equity To Invest In Real Estate

    Its Not The Same As Evaluating Residential Real Estate

    While commercial and residential plots are both real estate, theyre evaluated differently by market experts.

    A top real estate agent will look at two essential things when it comes to Charlotte, NC homes. These are square footage and the sales of comparable properties in the area.

    As for commercial real estate, different metrics are required. To be exact, youll need a set of comps .

    North Carolina investment properties and homes for sale are lower than the national average. #NancyBraun#ShowcaseRealty#CharlotteNCHomesForSale#CharlotteNCRealEstate

    Showcase Realty

    Why Does Commercial Property Valuation Matter

    3 Key Ratios to Evaluate Real Estate Investments (#1 is All You Need ...

    Property valuations matter for several equally important reasons. For buyers, an accurate valuation allows them to pick up a property at reasonable market value and ensures they do not overpay for an asset. Likewise, sellers use valuations to price their properties at a level where they can maximize their returns from the sale, as well as ensure the property moves in a timely fashion.

    Valuation also comes into play when it comes to financing. Lenders and banks will only lend when the property is sufficiently valuable to act as collateral and can generate the necessary revenues to pay off the loan and deliver value to shareholders in the property.

    Now, there are several methods that investors, real estate professionals, and finance professionals use to conduct property valuations- these methods are often situationally dependent based on the individual property’s characteristics, like property type, location, intended use, etc.

    Recommended Reading: I Need Help Investing My Money

    Popular

    More like this
    Related

    Best Real Estate Investing Advice

    There Is...

    Series 65 Registered Investment Advisor

    Who Needs...

    Best Investments During Rising Inflation

    Are Cds...

    How To Become An Sec Registered Investment Advisor

    Competitors In...