For a lot of investors, the switch from residential to a commercial investment property can be a lot of mental stress. Most investors making the switch are unaware of all the complexities of commercial properties, their requirements, how to find tenants, the management, etc. That’s why it is important to have one of our professional commercial real estate brokers helping you through the process.
Is the Property in Demand?
Depending on the type of property you are interested in buying, it’s important to make sure there will be sustained demand for that property type. A lot of attention used to be on whether it is internet resistant, but now you should ask yourself if it is “pandemic” resistant as well. Making sure that your property will be sought after will safeguard that your investment will be in demand by tenants long-term.
Is the Location Marketable?
Part of making sure that your property is in demand is to make sure it is desirable. Researching and choosing a market and a good location within that market is important in finding a good investment. Complete your due diligence and check on zoning ordinances to make sure you can continue to operate the property in the way it is currently intended.
It’s also important to check on the development pipeline near your property. Make sure you know what is coming to the area to know if it will affect your property’s profitability.
Can I afford a Vacancy?
Unlike multi-family property, it is unlikely you are going to have a waiting list of tenants to take over a vacant unit. There can be a lot of costs associated with re-leasing the unit. You will have possible tenant improvement allowances (“TIA”), repairing demand to the unit, real estate broker commissions, and while it is not a direct cost you have lost revenue on that unit. When we have a new client purchase real estate, we always recommend not taking any owner’s draws during the first 6-12 months to build up a healthy reserve account, assuming there was not a significant down payment into the deal. That way if there is a loss of a tenant or the only tenant in a single-tenant property, you have some money to help make it through that vacancy.
Are the Tenants Paying Market Rent?
One of, if not the most important things to look at when purchasing an investment property is the rental rate the tenant(s) is paying at a market rate. Many times tenants will do a sale-leaseback arrangement in which the tenant sells the property to an investor and leases it back from the investor. While the majority of the time there is no fraud or malintent, there can be a significant risk. You need to look at current market rents for similar spaces and ask yourself is the tenant(s) paying market rent? If they are paying above-market rent, why is that the case? Is there space unique, was there significant TIA given to them, was this rent used to increase the purchase price, and can they afford the rent? For a multi-tenant property, you need to look at the rates the tenants are paying now but also in the option years. If you have a tenant paying just under market rate now, but they have no increases in the rate for the next 5 to 10 years you can have a property that may decrease in value over the next 10 years.
Does it Fit with Your Investment Goals?
Does this commercial property investment fit with your investment goals? Ask yourself this and make sure that it works for you and your overall investment objectives. Are you looking to buy, repurpose, and sell? Are you looking for a long-term hold? Whatever the case, we advise you to be patient and choose appropriately. For 1031 exchange clients, are you in a buyer or seller’s market? If it is a seller’s market with limited supply and higher purchase prices you should start the search for an exchange much sooner than when the timeline starts. Having to pay the capital gains tax can be a significant amount of your proceeds but so can picking the wrong property because you were rushed into choosing.
At Latitude Commercial, we offer comprehensive and research-driven transaction solutions. We have a team of experts with real-world leasing and sales experience that will help determine the right price to sell or purchase your next investment property. We assist investors in a variety of disciplines including, but not limited to, retail, office, industrial, multi-family, senior housing, hospitality, and healthcare. Whether you are looking to do a 1031 like-kind exchange or simply capture your gains we work with institutional and private owners, operators, and investors in the investment sales arena.
Latitude Commercial provides commercial real estate services such as purchasing, leasing, landlord representation, tenant representation, and property management throughout Northwest Indiana and the Chicago Suburbs. To find out how we can help you, call us today at (219) 864-0200.