Investments come in all shapes and sizes. No matter what the investment is on, there always remains an element of reward and risk. Seasoned investors know how to maintain this balance between risk and reward and establish a diverse investing portfolio.
One such investment option is Commercial Real Estate investment or CRE investment. In CRE investment, the investor deals with hard assets like land, buildings, or property which he or she purchases and owns. The investor can then lease the owned property to tenants on rent and thereby earn a monthly income.
With the difference in investing in hard assets as opposed to stocks and bonds, CRE is similar to any other investment. This is in the sense that investors must be able to find the features in a commercial real estate that will allow the investment to yield a profit through high returns. These features make or break the profitability of any commercial real estate investment.
Features of Commercial Real Estate
When opting for a profitable commercial real estate investment, the investor should ensure that the properties should have some or most of the following features-
- The total number of tenants: a profitable commercial real estate investment is directly related to the number of tenants in each property. Commercial properties that have a higher number of tenants will bring in higher returns on the investment. The more number of tenants in a single commercial property, the more will be the income. Properties like RV parks, office buildings, apartment complexes, storage units, and student housing buildings allow for a higher number of tenants. A more desirable property will attract more potential tenants easily. This greatly increases the overall profitability of a commercial real estate investment.
- Knowledge of area and supply and demand: when investing in a CRE, the investor is also investing in a certain geographical area in which the property resides. These areas come with their unique supply and demand structure. A property that is undersupplied in the supply-demand chain in the specific area will be a feasible investment to plan future growth and success of the CRE investment. Knowing the market cycle of the commercial real estate area will help make better financial decisions to improve on the property.
- Well-developed area: CREs that show promising growth and profitability are often situated in high traffic areas. Being in a well-developed area will greatly increase the chances of attracting tenants to use the property for commercial use. This will also result in tenants renewing their lease and staying for a longer time. This, overall, increases the profitability and stability of cash inflow from a well-invested commercial real estate. A more urban locality is more likely to attract a higher number of tenants than suburban and rural areas.
- Triple net lease: a triple net lease is an agreement in which tenants of a property agree to all the property expenses, including maintenance, building insurance and estate tax. Normally, properties with most tenants have higher returns. But the triple net lease is a high ROI exception to that. A triple net lease property is beneficial for newcomers to commercial real estate investment. This is because tenants are more likely to stay for a longer time, all the while taking over the task of payments for maintenance, insurance, and taxes. This results in the property owner having a stable income without needing to re-adjust the earning after meeting maintenance costs. A triple net leased property also opens up time for the property owner to scout other income sources to add to the CRE’s returns.
- Security and risk in the locality: the level of criminal activity in the CRE area plays a vital role in profit. No individual will want to stay in an area that is prone to crime and break-ins. A profitable CRE investment is one where the area is known for its safety and security. The prevalence of police in the vicinity of the CRE can also help greatly appreciate its value, thereby attracting more tenants. Having better security and a safer neighborhood will provide commercial businesses the surety to rent a property in that area, which helps increase the likelihood of higher returns on the investment.
- Education: schools and libraries in the vicinity of a commercial real estate will help attract large families. This will allow an increase in traffic, making the property appealing for commercial businessmen to set up shops. Similarly, students will prefer housing and accommodations nearer to their institutions. All of this will improve the likelihood of attracting more tenants, which will improve the returns on commercial real estate investment.
- Basic luxury amenities: a profitable CRE is one that offers its potential tenants basic amenities in a convenient fashion. This includes parks, restaurants, libraries, gyms, theaters, and others. Having such amenities in and around the locality where the commercial real estate is will elevate the want for that particular property. One of the biggest factors is proper connectivity. Investing in a CRE in an area that is well connected by transportation is an attractive feature searched by all potential tenants.
Other luxury amenities like SPAs, salons, and malls are also likely to appreciate the CRE’s want as this will help potential commercial tenants set up shop in a business district.
The availability of amenities will make tenants more likely to renew their lease on the property, thereby further increasing the commercial real estate investment returns for a longer period.
When opting for investment in commercial real estate, it is important to keep the above features in mind. The more features a property possesses, the higher the returns. Being a hard asset, a commercial real estate property can be easy to evaluate. Potential investors can physically visit the property and scout the surrounding area. This allows the potential investor to research the property and the area and make a more substantial decision on the amount of profitability a certain real estate possesses. Prioritize requirements and keep an open mind while evaluating properties.
Commercial Real Estate Features FAQ's:
Commercial real estate is expensive as it requires more capital to be built upfront. The square footage involved in commercial properties is much more than residential properties. Also, as with any type of property, location is a key deciding factor when it comes to market value.
Get your property listed on commercial third party websites. Create your own website with SEO optimized content to garner tenant attention. You could run ad campaigns, leverage the power of social media to highlight your project features. You could also seek professional help in order to run marketing campaigns.
The return value on commercial properties depends on a number of factors. The value of the property itself, location, the surrounding area and also the economic condition play a role in determining the success of a commercial property investment. Compared to residential, commercial properties do offer higher returns, but do consider all risk factors before signing on the dotted line.
A value add property is a property space that may reach its potential value post being worked upon. This is a moderate to high risk investment type. To achieve a good ROI, investors will have to pump in both capital and sweat to reposition the property in the marketplace.
To calculate return on commercial investment one needs to have an understanding of concepts like Net operating income (NOI), Capitalization rate (CAP rate), Internal rate of return (IRR) among others. These metrics help investors calculate the performance of a property from over a year to its lifetime.