Commercial real estate is an excellent way to diversify your investment portfolio. The benefits are numerous, and the advantages to developers and investors are worth the time and money involved. What should you look for when making an investment in commercial real estate? As proven real estate investors, here’s what we recommend:
Consider the type of property you want to invest in.
According to vts.com, the six most common types of commercial real estate are office, retail, industrial, multi-family, hotel/lodging, and special purpose. The specific classifications, supply and demand, and overall profitability relative to each type vary depending on location and market conditions. Certain types may be more profitable and worth your investment depending upon these factors.
Be mindful of the location of your potential property.
Specific properties perform better than others based on the supply and demand levels in their respective locations. Every market, sector, and economic period will present unique benefits and challenges when making a commercial real estate decision. To make the best investment, research the asset types that can be most profitable in your desired location.
Research the supply and demand for different property types in your area.
One of the most important things to know before investing in a type of commercial real estate is that every market is different. When you invest, you are investing in a specific geographic area that has its own unique supply and demand. Certain property types may be doing well on a macro level but you may find there is an oversupply in your city, or vice-versa.
Remember revenue differences when renting to one tenant vs. numerous tenants.
The benefits and challenges of investing in an industrial park (fewer tenants) versus a retail complex (multiple tenants) can differ greatly, but the return on investment can be great depending on the location and market you are in. You can also qualify for specific benefits such as lease comps based upon the type of property and location you invest in.
Determine what renovations or improvements might need to be made to your property.
If you choose to invest in an existing structure or property, consider the financial costs and benefits of that structure. Improving and renovating a property can increase your return on investment (ROI) through more satisfied tenants or customers. However, if the cost of improvement or renovation is projected to be higher than the potential ROI, consider a property or structure that does not require significant improvements.
Determine the total investment before you make your final decision.
As you are considering a commercial property investment, make sure that the total cost, renovations, return on investment, and all of the above considerations fit into your budget and financial projections so that you can make a well-informed investment decision. Also, be sure your real estate pro forma is as accurate and up to date as possible. A real estate pro forma includes investor metrics such as net operating income, expenses, and cash flow.
No matter the location, type, or size of your commercial real estate investment, it is vital that investors do their due diligence for new property development. This means full research of numerous considerations specific to your personal portfolio, your location, and your desired property type. Investing your time in research and the considerations above can help manifest a smart and profitable commercial real estate investment.
If you are interested in investing in commercial real estate in Utah and the Intermountain West and are interested in the benefit of having an experienced partner who can help guide you through the real estate development and investment process in order to maximize your return and profits, we’d love to talk.