But commercial real estate can also be risky.
Each kind of real estate has its own advantages and disadvantages.
Commercial real estate is subject to a unique set of circumstances that determine the overall value of its investment potential. Chief among them is its commercial function—your property will be used for business and entrepreneurial purposes, after all.
You can mitigate your risk on a commercial property’s investment potential by asking questions specific that reveal its effectiveness as a home for business.
Like any significant investment, asking the right questions helps you make the right decisions with your money.
We’ve been investing in highly successful real estate for almost 45 years. These are some questions we ask ourselves before we make winning investments.
Why is This Property Being Sold?
This simple question can reveal loads of valuable information that will help you make an informed decision about the property’s potential.
There are so many reasons why someone might be selling. Getting a better understanding of why the property is for sale provides you a great starting position to ask more pointed questions that establish its ROI potential.
You’ll be in a better position to negotiate a fair price when you know the seller’s motivations.
Furthermore, there could be legal entanglements or other issues that are driving the property’s sale the seller may not be forthcoming about. Failing to inquire about such entanglements could stick you with financial or legal liabilities when you buy.
This question should be one of the first things you ask when you meet with the seller. You can avoid an unwise investment simply by asking why the property is being sold.
Know why before you buy.
What is the Market for Commercial Property?
This is a question you should find an answer to before your search even begins.
After all, you don’t want to wade into the market at a moment that won’t get you a return on your investment. This kind of question is the sort of “look before you leap” thinking that can help you make a great decision or save you from making a bad one.
Find the financial trajectory for properties like the one you intend to buy. Getting a better understanding of the market for commercial properties before you close can drastically affect the success of your investment.
See if there are other commercial properties for sale in the area. The more there are, the better your negotiating position will be. For an investment like a commercial real estate property, you want to use every opportunity you can to get the best deal.
A little research into the state of the market before you buy can go a long way.
What’s the Ideal Business Your Property Serves?
With residential real estate, the purpose behind the property is clear—it’s a living space.
Commercial real estate is a little more complicated. While the property is developed for commercial use, the range of enterprises that could inhabit that space is vast. That makes choosing a bankable property more complex.
You don’t need to just account for the commercial real estate market, but the market for the enterprise your leases will be serving.
There are many different enterprises that commercial properties can serve. Food/service, retail, it all depends on the design and functional potential of your property.
Take into consideration what the demand may be for a property like the one you’re planning to buy. What businesses would be a great fit for that property?
Their success is your success. So choose a property that will support a business you can trust to succeed.
What is the Maximum Occupancy for Your Property?
Determining the maximum occupancy of your property fills you in on some key information.
For one, it’s a necessary number to know in order to ensure the safety of your property. Abiding by the maximum occupancy of your building guarantees that you’re following all the right precautions that will keep customers safe and prevent you from running afoul with regulators.
Secondly, the maximum occupancy of your prospective space provides you with a key insight into the potential of the property.
Commercial properties naturally vary in size, which naturally affects the maximum occupancy allowed in the building. Furthermore, the type of business the property was developed to serve can affect the maximum occupancy as well.
Many factors determine the maximum occupancy of a building. By knowing that key number, you’re better equipped to utilize the property to its fullest potential.
What’s the Developer Like?
Knowing the property developer is just as important as knowing the property itself.
There will be many elements regarding your property’s value that hinge on the developer’s cooperation. That being the case, getting a sense of the developer’s character and reliability will build your confidence in the property you buy.
Real estate is an exciting, rewarding field. But like any sort of business, it’s important to avoid unreliable clients.
You’re making a significant investment. In many ways, you’re relying on the good faith of the developer. Building a relationship that establishes trust with the developer will put any concerns about the security of your investment at ease.
You can assess the reliability of a developer by researching their history with other properties. In doing so, you can see for yourself whether they’ve been successful in the past.
Does the Property Need Repairs?
Like any property, assessing the state of a commercial property is an absolute must for would-be buyers.
Commercial properties must follow a strict set of regulations. In order to meet those regulations, you need to ensure your property is in good enough shape to operate. Familiarizing yourself with the repairs the property may need, now or in the near future, factors into the total value of your investment.
Maintaining a commercial property can get expensive. Factoring in the expenses of making those repairs, should they arise while under your ownership, will give you a better grasp on the carrying cost of the property.
What’s The Location Like?
Commercial real estate depends on three things: location, location, and location.
The location of a commercial property can be the defining factor between a business’s success and failure. The lifeblood of a business is its customers. The visibility and accessibility of your commercial property play a huge role in the number of customers that will be supporting your commercial space.
Keep an eye out for location-based factors that could help or hurt a business operating at the property. What’s the surrounding neighborhood like? Is it a mostly residential area? Determining the viability of a commercial property depends on much more than the property itself but the area surrounding it.
What types of businesses are in the area? Assessing the commercial ecosystem surrounding your prospective property can help you determine its competitiveness against other businesses. Furthermore, you can get a better sense of what businesses succeed and which ones fail in the area.
Is the property hard to Get to? Is it easy to see?
Sustaining a commercial property that requires a high customer base to succeed will need to be easy to find and easy to get to. The harder it is to reach, the worse off the leasing business will be, which will hurt your investment’s potential.
These questions will help you assess the commercial value of the property. The better the location, the better the investment.
Can I See The Pro Forma?
If you are buying a commercial property from a business, obtaining a from them pro forma can provide you with crucial information. You can learn a great deal about the commercial viability of the property from a pro forma.
A pro forma is a financial document that outlines everything from maintenance costs to income reports about the building.
The property’s pro forma will include its net operating income or NOI. An NOI is determined by subtracting the property’s operating expenses from its total revenue. As an investor, this is critical information you’ll want to know—and NOI helps you assess the property’s financial potential in clearer terms.
What Are the Current Tenants Like?
Depending on the type of commercial property you buy, there may be tenants operating there. Commercial property ownership will involve you working with current and future tenants running their businesses out of your property.
Considering the tenant experience will be a cornerstone to your property, knowing any current employees will give you a headstart on building those relationships.
You’ll also learn financial information that will determine the investment potential of the property. For current and future renters, knowing the property’s rent roll will give you a clear picture of what the rental income range of the property could be.
Learning about the payment history of the current tenants will help you assess their reliability as tenants. If they are consistent with their rent, you have a sound income source already confirmed for the property. If not, you’ll be better prepared if you need to make adjustments.
Is the Property Up to Code?
Commercial building codes in your area could vary from town to town. For all you know, there could be aspects of the property you’re looking at that may need to be updated in order to meet the regulatory requirements.
If it isn’t, it will be your responsibility to make those improvements so that the property is up to code.
Familiarizing yourself with local ordinances and other regulatory codes in the property’s location will help you train your eye to search for parts of the property that don’t meet requirements.
There are plenty of resources you can research on your own about your property’s building code requirements. Most states have a .gov resource that outlines the information you’ll need to know. Here’s a helpful code resource for California properties, for example.
Are There Future Development Plans For Your Area?
Having some foresight for future development plans in the area will help you make a better decision about your property’s potential.
As a commercial space, your property will need a reliable stream of customers to keep the leasing business running. Knowing about future development in the area could affect the viability of your property’s business potential, for better or worse.
For example, there could be housing development planned in your area that would provide your property with a stronger customer base. Alternatively, there could be plans for a commercial complex that could compete with your space.
You can see the long-term potential of commercial property by looking into pending or future development in its vicinity.
Do I Have an Exit Strategy?
In real estate, you should always hope for the best but plan for the worst.
Factors outside of your control could affect the value of your property after you buy. Economic hardships, trouble with tenants, all a range of issues could arise that affect your ROI. Your return on a commercial property heavily depends on the business success of your renters, which is not in your control.
With large investments, it’s important to have a clear exit strategy if things don’t go according to plan.
Enter into an agreement that leaves room for future uncertainties. Don’t pay a price that makes selling your property at a loss impossible for your budget.
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Commercial Property Safety Requirements: Maximum Occupancy | CCPIA
Net Operating Income (NOI): Definition and Formula | Quicken Loans