Commercial properties have the potential to provide investors with high returns and solid capital growth. These positives attract investors to take the plunge and park their money in commercial properties rather than residential properties. 

However, investing in commercial real estate can require making very different and complex considerations compared with investing in a residential property. If you decide to put your money in commercial real estate, you will learn that financing is more complex, lease terms are longer and that getting the right tenant to rent your property is important to succeed. 

Simply put, it’s easy to get a commercial property investment wrong if you don’t have extensive experience in the sector. To ensure that you are buying a good and profitable commercial investment property, here are some key questions to ask. 

1. Does the commercial property suit your investment goals?

Before you purchase an office building, a retail centre, an industrial warehouse or any other kind of commercial property, make sure that it fits with your overall investment strategy. How will the commercial property suit your needs? How will it fit in with your investment portfolio? 

While a property may have a lot of potential and is a great buy, it may not be in line with your investment goals. So, it’s important to ask the questions listed above. It’s easy to think that a commercial property will be a good addition to your portfolio (whether it’s for diversity or for increased returns), but that great opportunity must fit in with your other investment.

2. How good is the commercial property’s location?

It’s a mantra we’ve all heard when it comes to real estate: “Location, location, location.” And while it’s a cliché, it’s a fool-proof rule of thumb. A property’s location will give you a good idea of its current and potential value and how much income it can generate for you if you do decide to take the plunge. 

Do your due diligence by researching your commercial property thoroughly. There are a multitude of statistics offered in property industry publications and websites, including rental yields, vacancy rates, capital growth, incentives, land value and replacement value.

However, don’t rely solely on data when purchasing commercial property. Information may often be incomplete or irrelevant if the investor simply takes it at face value. Like any real estate investment, make sure that your property is in a desirable location by scoping out the neighborhood or the vicinity in person. Know what amenities or transportation hubs are near your location and make sure that it is free of any factors that could decrease its value. 

3. Will there be sustained demand?

Having demand for commercial property is good, but sustained demand is better. Scrutinise the commercial property you’re planning to buy up close. How long is the average commercial leasing period? Are there plenty of other similar commercial properties in the area? If you have a deeper knowledge of the area you are scouting, assessing the demand should be a pretty straightforward task.

For example, if you are eyeing an office building in a growing city with a low supply, the demand in the area is expected to be high for many years. This could mean sustained, high demand. It makes your investment secured for the long term and, eventually, bigger capital growth potential. It also means that the property will be easier to sell when you’re ready to exit the market. 

However, with the influx of a bigger working population, you should still be careful. The market may get oversaturated with new developments 

4. What if you need the money you invested?

It is important to have a flexible exit strategy in any commercial real estate investment. While the sustained demand for your investment property is a major factor for this, the specific investment conditions you agree to can also have a huge impact on the asset’s worthiness to be in your portfolio. 

The best conditions to ensure you have a flexible exit strategy is long guaranteed income periods with attractive yields. These give investors the opportunity to jump ship at any stage during the investment cycle while providing buyers with attractive conditions on a fully operational and proven development.

This flexibility is not available if you have shorter guaranteed income periods, due to less attractive investment conditions being available at resale.

 5. What are the risk factors?

Certainty is a commercial property investor’s best friend. First of all, most risks associated with commercial real estate investing can be mitigated by following all the advice we’ve listed so far. Additionally, you should ensure that any contracts you enter are robust and asset-backed. 

And like any investment, always prepare for the worst-case scenario. 

You should ask yourself what impact this could have on your ownership of the property and make sure to have contingencies in place to protect against it occurring. 

Conclusion

It’s easy to get a commercial property investment wrong if you don’t ask the right questions before buying. Obviously, there are more than just five questions you should ask before purchasing commercial real estate. Depending on the type of property you plan to buy, and what your intended use is, there is a myriad of information that you need to know. Consider these questions as a solid foundation when you begin your commercial property investment journey. 

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