1. Organize Your Finances
Since purchasing commercial real estate is not an easy task, you’ll want to be as organized as possible. More importantly, you want to have your finances in order before you even begin.
Your financial situation will determine what type of property you can afford. If you end up going after a property way out of your price range, there is a good chance the bank will decline you for financing.
Speaking with an accountant is a good idea to help give you a snapshot of what you can afford. They will also be able to help you develop a budget that includes all hidden costs that come with this type of purchase. Your accountant can also find tax benefits for you that could be significant to your financial state.
2. Location
As the saying goes, real estate is about “location, location, location.” Location remains one of the most important factors for investing in commercial real estate. It includes many variables such as:
•Vicinity to Other Businesses/Services
•Access to Public Transportation
•Parking Availability
•Neighborhood Amenities
•Scenic Views
•Market Activity & Values
•Visibility
•Zoning
As you evaluate specific locations, include both current and future factors. What projects are approved in the area? What changes are being discussed? Are there open lots that may be developed in the future or older buildings that may be demolished? How might the business landscape change in the area over the next several years? A thorough analysis will help you better predict property performance over the lifetime of your investment.
3. Value
The value of a building involves complex analysis that includes construction, utilities, equipment, maintenance, and market performance. Three common approaches to assessing value are: the sales comparison approach, cost approach, and income approach. Given the different methodologies for each, it is helpful to review and compare all three.
4. Investment Purpose
Any property that you purchase should fit with your overall goals and portfolio. An ideal self-use property may be different than one intended solely for lease. Some properties are better suited for long-term investment than short term. Only through a keen understanding of purpose can you leverage the right assets to achieve your goals.
5. Cash Flow & Profits
For all investment purposes, cash flow and profitability are key. Projection models are helpful for short-term and long-term analysis that include income expenses, capital improvements, asset value growth, etc. Tax benefits such as depreciation can be included for a more comprehensive financial forecast. Looking at the big picture is one of the most important factors for investing in commercial real estate.
The complexities of a commercial real estate transaction require a knowledgeable real estate professional. I’m always here to help. Email me at pthessen1@gmail.com.
-by Perry Thessen
