Many investors are on edge given recent market shocks. Not too long ago, market volatility and one-day drops in the Dow Jones made many equities investors wonder if the decade-long run is running out of steam. The economic expansion has been a record breaker for peacetime growth, and a recession will happen sooner or later. Possible trade wars between existing economic partners and the unknown details and impact of Brexit hang over the global economy, in addition to the usual tension spots of Korea and the Middle East. Higher interest rates seem to be looming and pointing to market cycle shifts, meaning equities investors are considering reallocating their portfolios more towards other opportunities for investment, and one sector drawing interest is commercial real estate. Consumer spending accounts for two-thirds of economic activity in the country most years, and population growth alone can drive commercial expansion even in a recession. So, is it a good time to invest in commercial real estate? It’s not a simple question to answer, but it can be easier to figure out if you instead ask specific questions with more narrow focus, including the following:
Do You Know What Commercial Property Is?
In order to invest in commercial real estate, you need to know first what it is, and the definition can be quite broad. It might mean retail buildings and office structures, but it can also include industrial facilities and warehouse environments. Even though you might consider apartments residential property, they are actually classified as commercial. While all these might be considered commercial real estate, each does come with its own set of nuances.
Do You Have Enough Cash?
In most markets, buying commercial real estate is going to mean at least 20 percent for a down payment. If doing a transaction of that size would throw your entire financial portfolio into a severe cash crunch, you’re not likely ready for property ownership.
Is The Mortgage Affordable?
You need to calculate what the monthly recurring costs of a property would be, in case you can’t find any tenants or have to leave the facility unoccupied during renovations or construction. If you don’t have enough income to cover it, your investment would cost you money rather than make it.
Is There A Good Property On The Market?
The national market, larger economic conditions, and overall interest rates might not matter as much as whether or not you find a good deal. Commercial real estate is the sector after all that was the source of the cliché about location, location, location.
Is It A Good Neighborhood?
Don’t just look at the neighborhood in terms of schools and whether or not you’d live there. Consider a dispassionate approach and see if the community is thriving in an economic sense. Look over the commercial district for its popularity and vacancy rate. See if prices are trending upward or downward. Estimate whether or not property valuations will appreciate or not.
Is There Income Potential?
This might be the best single reason to invest in a commercial property over a residential rental. Single-family homes usually range between 1 and 4 percent annual returns, but the right commercial property can land between 6 and 12 percent. That’s on top of you preserving or growing wealth through property value appreciation over time.
Are You Ready To Be A Landlord?
When you take on a commercial property, you take on the need to find tenants. Then, you take on their rent, but also their problems and the many decisions that come with them, ranging from rental rates to structural improvements. If you’re not ready to be a landlord, a good alternate question is whether or not you’re ready to give up a portion of your profit margin to the right property manager.
Can You Take Advantage Of Triple Net Leases?
There are many variations to these, but the typical idea is that a property owner pays no expenses that happen on the property. Anyone leasing from you handles all property expenses on their own, including taxes. All you have is the mortgage. Businesses such as Starbucks, CVS, and Walgreens love these kind of leases, because even though they absorb all costs, they have the power to maintain their branding and image. Investors that least to them get low-maintenance income streams for their dollars. These can’t happen in residential properties, and smaller businesses usually won’t sign them, but the right strip mall might have various net leases happening all at once.
Can You Stomach The Risk?
Commercial properties have higher levels of risk because they have far more visitors than residential properties do. Anyone one of them might get hurt or personally damage your property. Cars might hit shoppers in the parking lot, vandals might spray paint your walls, and anyone can slip on winter ice. Things like this happen all the time, but they happen more when there’s more people, especially if they’re not at their own homes where they are more careful. Residential properties prove safer for risk-adverse investors.
Are You In A Secondary City?
In a nation the size of America, there are many individual commercial real estate markets with varying valuations from state to state and even from one city to the next. New York City, Los Angeles, and San Francisco might have very mature markets, meaning the better opportunities lie in the suburbs or second-tier cities. So, instead of big names, look at places like New Jersey, Sacramento, and Riverside or Orange Counties.
Do You Know The Local Market?
Even in a potentially looming downturn or economic recession, some local markets will still grow. A recession just means the overall economy contracted two consecutive quarters. If an area has a growing population, that’s a plus. So are infrastructure projects at state and municipal government levels that make properties more affordable. Projects like Google Fiber can also make particular markets more connected than others. Likewise, look into local rules and regulations that might hinder your profits.
The more of these questions you can answer yes to, the more likely it is a good time for you speak to a top commercial real estate company to invest in commercial real estate, regardless of what’s going on in the larger world around you. Here, your focus is just one building at a time.