Investing in commercial real estate presents the right investor with many potential benefits and advantages. Commercial investment properties include retail businesses, office space, industrial buildings and more. The common thread between all commercial real estate is that the tenants are producing income. Successful commercial property investing requires that the investor has an understanding of the financial requirements, property management options, leasing possibilities as well as a comprehension of all potential risks.
The following are important things to consider when purchasing a commercial investment property. The below can help you decide if a commercial investment property option for you based on your capabilities and goals:
Tenants of a commercial investment property
Landing the ideal tenant for your commercial investment property is not a quick task. Finding the right tenant takes time, but the benefits of a good tenant are exponential. Good tenants pay their rent on time, stick around for longer leases and even increase the value of your commercial property. Commercial tenants can be vulnerable and highly affected by turns in the economy, therefore commercial investment properties come with a risk of having an under-occupied property if a tenant has business troubles. Understanding demographics and the types of business you can lease your space to will help you best prevent unwelcome vacancies.
Most tenants of a commercial property have a vested interest in keeping your building and property in good, presentable condition because it is what’s best for their business. Because of the above, commercial tenants will often maintain and even improve your property and increase the value of your investment.
Purchasing and selling a commercial investment property
Even more than residential real estate purchases, purchasing a commercial investment property is a fairly complex process and the experts you hire will make this experience less stressful and more lucrative. You’ll want to consider a commercial real estate lawyer, an accountant, a commercial real estate agent and a mortgage broker. Because commercial mortgages carry a greater risk taken on by the lender, stricter terms and conditions are often used to offset these risks. This same high risk taken on by the mortgage lender often results in slightly higher mortgage rates as compared to residential mortgages. Before beginning your search for the right property, consider getting pre-approved for your commercial mortgage so that you can narrow down your search based on your budget. An experienced real estate agent will be by your side guiding you in considering the highly important aspects of each property such as location, condition, price and allowed uses of the property.
You can never know too much about a property you’re considering purchasing. Furthermore, you should know the market in depth and have a good handle on lease rates and vacancy rates. Your due diligence regarding a commercial property you’re interested in includes examining all documents such as maintenance contracts, title documents, insurance policies and leases with current tenants. In addition to the above diligence, you will be required to comply with and meet the mortgage lender’s conditions before you move forward with a purchase. Some lenders will require building inspections and environmental assessments. Keeping track of everything you’re responsible for and having a team of professionals working with you whom you trust will ensure a smooth commercial investment property purchase.
Management of a commercial investment property
It is likely you’ll be interested in hiring a property manager to discover and vet possible tenants and implement lease agreement signing for your commercial investment property. Having a property manager to oversee day-to-day matters of your commercial property may or may not be necessary depending on your property, tenants and agreement with these tenants. Often times tenants of a commercial property will sign a triple net lease, meaning the owner is exempt from paying the costs of the property other than the mortgage. Costs such as insurance, property taxes, utilities, repairs and maintenance would be taken care of by the tenant in a triple net lease. A triple net lease may mean less business to be managed by a property manager. It is also thought that business owners renting a commercial space are less likely to reach out to a landlord for small fixes and will repair small problems themselves so as to carry on with their business.
In comparison to residential investment properties, owning a commercial property often means longer leases. Though there are some possible downsides to longer leases, the benefits tend to outweigh them. Some benefits of longer leases include lower vacancy rates, lower turnover costs as well as the assurance of a reliable cash flow.
Locations of commercial investment properties
When considering a commercial investment property, the importance of location can’t be emphasized enough. There are two ways commercial properties provide the investor with returns: capital appreciation and rent. Both the rent you can charge to your commercial tenants and the rate at which your commercial property appreciates depend heavily on the location of your property. Understanding the demographics such as population growth of a given area you’re interested in investing in commercial real estate will help you understand the market dynamic that will impact your investment.
The first step in a successful investment in commercial real estate is to find an experienced real estate agent. An agent who is well-versed in commercial real estate will be invaluable in guiding you through your commercial real estate investment.
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Our team at Sylvain Bourgon Real Estate have experience in all different types of investment properties whether it’s been in personal investments or facilitating successful investment property purchases for our clients.
If you are seeking buying an investment property in the Ottawa area, or have more questions for us, we are happy to provide you with helpful guidance and support. Email us at info@buyandsellottawa.ca or call us at 613-590-3036.