Whether you plan on selling or renting your investment property, you’re definitely hoping to make a profit. Before you make a decision that will impact your finances, consider these four factors to see if your commercial real estate investment is viable.
You may have heard that location is everything in real estate, and this is especially true for commercial spaces. In order to attract tenants, your property must be in a desirable setting. This doesn’t always mean it needs to be in the heart of a major city – up-and-coming neighbourhoods and centrally located towns are also great places for businesses-to-be.
Also consider the transportation options in the surrounding area; this will be a good indicator if traffic will be high for commercial businesses to thrive. Possible tenants will want to know their assets are safe – or if they need to take extra precautions – so evaluating the security of the area is important for judging if your property is viable.
Are there any immediate maintenance requirements to make your investment useable? This could mean a rather hefty upfront cost of getting your building up to code which you should factor into your budget.
Initial renovations can be enough to scare off buyers, so if you do take the plunge, make sure you get estimates on their return. If you do choose to rent out your investment property, the work doesn’t end after you’ve found a tenant.
You could be responsible for the maintenance of your property – no matter if it’s occupied or not. For this reason, many commission a third party for their commercial property management. They can handle maintenance issues, collect rent and negotiate leases while you sit back and relax.
Of course, this is an additional cost, and if a lot of maintenance is required, it can be a major drain on your resources. A viable investment property is ideally low-maintenance.
3. Cap Rates
One of the easiest ways to estimate the potential return on your investment is by calculating the cap rate. By dividing the net operating income by the current market value, you can see what your potential return will be and how it compares to other similar properties.
Knowing that number, you can see if the potential ROI aligns with your goals or expectations for the property. It can also help you identify any strengths or weaknesses of the potential investment to see if the risk is worth the payoff.
This quick evaluation is a great start for seeing if an investment is viable, but should also be used in conjunction with other factors. The cap rate assumes that revenue estimates are accurate and that the market value will remain unchanged, so don’t rely solely on this number for your decision making.
4. Local Market Trends
Finally, it’s important to be aware of the surrounding market to understand if your investment is worthwhile. Find out about current rents being achieved in the area and if they’re above or below market value. This will give you a better idea of how your property will perform and its potential for providing you with a return.
If there are many other vacant properties around, this could be a warning sign that your investment could be sitting around for a while.
There is no one factor that will determine if your investment is viable. You must consider all of them to get a well-rounded estimate on your ROI. For more help finding the best commercial real estate investment, don’t hesitate to consult with the experts on our team.