5 Things You Need To Know Before Purchasing An Investment Property!

Are you looking to invest in commercial real estate?

It’s possible that you’re a seasoned investor who knows exactly what you’re looking for, or maybe you’ve been a residential landlord and wish to transfer your skills to a commercial investment, or perhaps you have no experience whatsoever—whatever your reasons for wanting to make a commercial investment, the following 5 things are essential to consider before making any purchase.

1. Cash-on-Cash Return

Commercial investing can be very exciting, particularily for first-timers. We’ve all heard stories about certain investors who have gotten ridiculously rich simply by being in the right place, at the right time, with the right amount of money—it’s definitely hard to not fantasize about your own investment reaping the same rewards.

While commercial real estate investing can be very lucrative, it’s also important to realize that it’s an investment just like any other, such as stocks or bonds, each with its own associated risks.

When evaluating potential commercial investment deals, we recommend our clients look for a cash-on-cash return that is at least 3-4% higher than what is being offered on a risk-free investment, such as a GIC or otherwise.

2. Cap Rate Isn’t the Whole Story

Often, potential investors rely too much on the capitalization rate to determine the attractiveness of a particular investment. To calculate the cap rate, simply divide the value of the property by the net operating income.

The theory is that it provides a percentage that roughly estimates the percentage return an investor would receive on an all-cash purchase. While cap rates are important, they only provide a snapshot of the investment; further investigation is required to determine whether or not the investment is sound.

3. Net Rents

You must take a close look at the contract rents—are they at, above, or below market value for your given area? Especially if net rents are below market value, it’s important to determine for how long they will remain that way and why.

4. Deferred Maintenance

Looks can be deceiving! Always inspect any potential commercial investments very carefully and note what maintenance items have been deferred, i.e. that’s what you’ll have to cover. If big-ticket items such as the roof, windows, parking lot, or the HVAC system have been neglected, that’s a red flag that requires further investigation.

5. Lease Expiry Dates

If there are existing tenants, check their lease expiry dates closely. If all the leases are expiring within one or two years, the fact that you will need to renegotiate those leases fairly soon should be a part of your analysis. If the leases are done properly, they should be staggered so that they expire back-to-back.

Investing in Commercial Real Estate

The old adage, measure twice and cut once, has never been truer than when it comes to making a commercial real estate investment. The more effort you put into your research and due diligence, the better return you’ll see on your investment.

If you’re looking to invest in commercial real estate but are unsure where to start, contact the experienced team at Servis Realty to guide you through the process.