Commercial real estate can be an attractive investment, especially if you have a sense for upcoming neighborhoods (or know a really good broker who does), a knack for identifying trends and an interest in the market. Investing in commercial real estate takes more than just strong instincts; it requires an understanding of demographics, demand and risk. It can also provide the opportunity to diversify your investment portfolio.
Whether it’s to grow a portfolio, launch a business or generate rental income, investing in commercial real estate requires a long-term commitment. Below are four tips to help you determine if investing in commercial real estate could be the right financial strategy for you.
Understand property types
Commercial real estate includes most property types except single-family homes, including office, industrial or R&D/manufacturing, multifamily, retail and hospitality. By researching each type, you can determine which fits into your strategy, including the property types that, on average, generate the highest return on investment. There are a number of commercial real estate brokerage firms that produce market reports including JLL, CBRE and Colliers International in Boston to name a few.
Certain types of properties are riskier than others. For instance, hospitality, which is known to fluctuate between highs and lows, would be more of a gamble than a stable, commercial office property leased to a long-term tenant. Still other properties, like bank-owned or Other Real Estate Owned (OREO) can present an upside. OREO’s are usually a result of a bank obtaining the property in a foreclosure. Investing in properties that are bank-owned, can pose increased risk depending on how long the property has been vacant, but there can also be potential rewards and savings. Just make sure you and your lender discuss all the pros and cons before you sign any paperwork.
Investing in commercial real estate can be complicated and requires professional help from a trusted real estate agent and lender. Rockland Trust offers a variety of commercial loans and can walk you through the process.
Know your neighborhood
Once you have a solid handle on the pros and cons of investing in each property type, it’s time to thoroughly scope out the market. There’s nothing more important than location. Consider how you plan to use the property and make sure it fits in with the neighborhood and surrounding area. For instance, if you are investing in multifamily housing, find out whether it’s near public transit, if there is a college or university nearby and whether the property is in a town or city that is attractive to young professionals or has a large population of empty nesters. While investing in property in emerging markets can have an upside, there is also a chance that the location doesn’t catch on as fast as you thought, forcing you to pay more to attract tenants.
Other considerations to include:
Financing your investment
Understanding financing options for the different property types will help guide your investment decision. For instance, commercial lenders generally require 25 percent down, but for special-use type properties like sporting or recreation facilities, it’s not uncommon to see 30 percent down payment requirements. The type of property can dictate the complexity of the financing. Factors such as market risk, environment and age can play a big part. With the exception of hotels and owner-occupied buildings, lenders will look at the length of the leases. If the property is not fully leased and is at risk for losing tenants, it will be more difficult to finance. Additionally, shorter-term leases can raise a red flag because cash flow could become a concern if vacancy rises. While having a long-term lease with a credit tenant like a pharmacy or retail chain can provide financial security for the lender.
Clear legal, environmental and permitting hurdles
Once you’ve found your dream investment property, you’ll need to have it inspected and also identify any potential legal, environmental or permitting issues. Make sure you have a full inspection and make note of any areas that are not up to code or are in need of repair, paying special attention to any public safety issues. Spend time looking at the building; reviewing planning and zoning board websites (better yet, visit in person) to determine what uses the area is permitted for, if there are any plans to change the permitted uses or if there are other planned or approved developments that could impact your property. If you are planning to expand the property, it’s important to know what kind of permits you’ll need and whether your building abuts or is near conservation land. Also, rule out any environmental concerns such as groundwater or soil contamination, which will limit uses and any future development without considerable remediation expense.
Finally, get to know the community. In order to be successful you will need to be an active landlord. For more information or to better understand your options reach out to us; our experienced commercial lending team is here to help.
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