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Buying commercial property is not as easy as simply “buying land”.There is a higher degree of output – as a business, you need to invest considerably more time and energy into not only learning about the minutiae of the market, but also the people involved. There is more to consider in selecting the location and even about the purchase.
At the same time, commercial real estate is influenced by the cyclical fluctuations of the mainstream real estate market – it is therefore a highly nuanced investment.
On the other hand, possibilities for profit are also high.
Know why you’re buying
As land plays a significant role in a business’s capabilities and its balance sheet, identify both the long term and short term aspects of buying land. Does it factor into your own projections for the business’s growth?
Know the people involved
Investors and other people concerned with the finances is important in any real estate, you’re your relationship with them is even more important in commercial real estate. Unlike mainstream shopping for residential properties, you’ll need to rely more on your network to identify avenues of investment, and even gauge credibility of the people involved. Prioritize the accountant, lawyers, . An accountant can help you figure out what your business can afford and analyze the tax and operating budget benefits and the brokers involved.
Know the commercial real estate market’s specifics
Commercial real estate is a different game altogether – the valuation of commercial property is different from property for residential purposes – it emphasizes usable square footage, unlike buying residential space.
A commercial property will also have longer leases, and a bigger down payment may be required, especially if the area or the market is facing a credit crunch. Keep an eye on potential elements of depreciation – how will it impact your profit goals from the venture? Have a ready list of estimates of all the numbers. Pay particular attention to the big three metrics:
Calculate the NOI through an evaluation the gross operating income in the first year of the commercial property, and deduct the operating expenses. This should not be a negative number
Capitalization rate indicated the valuation of properties and income from them. More importantly, this is an indicator of the current value of profit or cash flow you can expect from the property
Loans are higher
With higher down-payments on the loan you take for a commercial investment, you’ll need to invest more. Work with good money lenders or institutions to ensure you’re financially qualified to put down the payment when required.
Do extensive research
You cannot simply Google around – you have to physically get to the neighbourhood, ask a lot of questions, talk to other owners and network through your own existing contacts to look for any shortcomings that are not immediately evident. Go through the past years newspapers keeping an eye on any issues that have not been addressed well enough – it could be as simple as water supply, or need extensive perspectives like legislation.
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