Investing in Commercial Real Estate

There are plenty of opportunities for investors to achieve superior returns on their investments by purchasing commercial real estate. Such properties can be stable and easily managed. There are many factors to consider in any purchase.

o   Property type. The first decision is whether to invest in office, retail, or industrial properties.

o   Local submarket. The investor will have thoughts on particular submarkets. Valuable insights can also be gained by consulting a commercial real estate professional.

o   Purchase price. Obviously, the amount of the investment is based on funds available to the investor.  Establishing the value range in advance makes the search easier.

o   Acquisition costs. In addition to purchase price, expenses may be incurred for survey, appraisal, environmental assessment, and legal fees.

o   Occupancy. In a multi-tenant property, there may be less than 100% occupancy. If so, plans should be made for leasing the property after purchase.

o   Capitalization rate. The “cap rate” is a metric frequently used to estimate the rate of return on the property.

o   Internal rate of return. The “IRR” is a metric that is much more involved and considers the entire picture of the investment from acquisition through disposal.

o   Condition of property. The investor will want to carefully consider the physical aspects of the property. There may be expected repairs or potential capital improvements required.

o   Income enhancement. In addition to rent income from tenants, some properties offer opportunities for additional income. For instance, an owner may install vending machines in building lobbies. If the property is located near a sports or entertainment venue, it may be possible to generate revenue by charging for parking.

o   Holding period. To properly assess a potential investment, the investor should have some idea of the projected holding period.

o   Disposal costs. As with acquisition costs, there will be expenses incurred at the time of disposal.

 
Investments in commercial properties cover a wide range. On the smaller end of the scale, some of the above factors can be assessed informally and “on-the-fly”.  As the size and complexity of the investment increases, investors should seek advice from practitioners who regularly work in their market.  With a good plan and an analytical approach, investing in commercial real estate can build a portfolio that will deliver solid results.