6 questions to ask before investing in commercial property

By Greg Bell

Investing in commercial real estate can be a valuable asset to any financial portfolio. Of course, there’s no such thing as a fool-proof investment, so it’s essential that you go into any transaction with your eyes open. Here are some important questions you should ask before investing in any piece of commercial real estate:

1. What are my objectives?

For the most part, commercial real estate investments are made for one reason: profit. But within those goals, there are shades of gray. For example, are you making an effort to diversify your portfolio? Are you looking to turn a profit quickly with some risk, or for something that will steadily provide a smaller stream of income with a lesser chance of failure? If so, be sure that this investment fits into that plan.

2. Is it a quality location?

Whether you’re investing in a storefront, a warehouse, or office space, the location of your commercial real estate investment is among the most important factors. Bear in mind that what makes a quality location for residential real estate is different than commercial real estate. However, some factors are the same, including proximity to public transportation or major roadways and the projected property values of the area.

3. Is there demand, and is it sustained?

Of course, you wouldn’t think of investing in a business if you don’t believe there is a market for what you’re selling. Theoretically, before you got to the point of looking for locations, you have a business plan that includes the kind of demand you believe is in the marketplace. However, commercial real estate investment requires long-term planning. It’s likely you are making a purchase or signing a long-term lease, so it’s important to look down the road and determine whether you believe there will still be demand for your product or service several years down the road.

4. Who else is investing?

Many investors who are looking to diversify their portfolios make investments in commercial real estate without being the sole owner or proprietor. If you are investing a few thousand dollars along with others, you need to know who you are going into business with. Look for as much transparency on the part of the investment manager as possible so you can be aware of how many other investors there are and how much they invested.

5. Do you have an exit strategy?

Before you get wrapped up in the exciting potential of your new investment, you need to prepare for the worst. Countless things can happen in your personal or professional life that require the acquisition of liquid funds fairly quickly. Is there a possibility for you to recover your investment should you need to have cash on hand? In real estate, this most likely means you have to lease or sell the property, so be aware of how long it was on the market when you scooped it up, because that’s likely how long it will take to turn over.

6. Is the developer trustworthy?

Unfortunately, it’s not unheard of for low-quality or inexperienced developers to make poor choices that can result in a disaster for investors. To avoid this, be sure to look into the history of the developer who you are planning on working with. While a lack of experience isn’t necessarily a reason to back out of a deal, it is important that you are aware of any shortcomings they have. Even experienced developers can have red flags in their background, so be sure to do your research before signing on the dotted line.

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