Have you considered investing in a commercial property? Maybe you’re already a residential investor, and you want to widen your portfolio. Perhaps you’re new to real estate investing and commercial investing seems like the best way to go. Maybe you’re a business owner or entrepreneur looking for the perfect physical location.
Whatever your motivation may be, it’s essential to know that commercial real estate investing isn’t cut and dry. Several factors go into a profitable commercial property. Sometimes a property that seems to be beaming with potential ends up being a money pit. Other times, a property that looks a little dull, ends up being a goldmine.
How can you tell the difference? More importantly, what things do you need to know before investing in commercial property?
Let’s jump into it.
- Picking the Right Property Type is Key
There are several types of commercial properties. There are office buildings, retail buildings, apartment complexes, warehouses, industrial structures, mixed-use buildings, and more. One of the most crucial tasks of commercial property investment lies in picking the right property type.
A lot of this deals with knowing the market trends and doing some future prospecting. For instance, right now, it wouldn’t be wise to invest in a mall. While malls historically made people millions, the market for the mall is dying.
Another example is housing. In highly populated cities, people used to invest in single or double family dwellings. However, the cost of living is rising faster than the rate of income, and people can’t afford these types of homes. As a result, investing in an apartment or a single-family property that you can break into a multi-family complex is a wiser choice.
These are just two examples; however, knowing the property type for the market is critical to making a profitable commercial property investment.
- Location Truly is Everything
Let’s talk about location. You can completely redo a commercial property, invest millions into making it look inviting and appealing. However, if the location stinks, there’s no getting around that.
Location truly is everything in commercial property. With that, the ideal location depends greatly based on what type of property you purchase. A retail space needs to be in an area with plenty of foot traffic, whereas a manufacturing warehouse would be better suited outside of densely populated areas.
When investing in commercial property, it’s pivotal to remember that you cannot change location, and that location can and will impact everything you plan to do with the property.
- The Interior Is Moldable – Look for Good Bones
While the location can’t be changed, the visual components of a building can be altered. Sometimes, a commercial property looks a little rough, but the potential lies in your ability to transform it into something new.
Aside from property type and location, you want to focus on the bones of the building. Does the property have a good structure? Can you go in and make aesthetic adjustments and improve the property?
Changing the structure of a building is a lot more costly and time-intensive than cosmetic improvements. Even minor layout adjustments are possible with the right bones. For instance, using modular glass panels, you can transform a warehouse with good bones into a workable office space.
Ultimately, it’s good to know that the most important factor lies in finding a property with the perfect potential. The bones and structural integrity generally matter a lot more than the aesthetic interior and exterior blemishes.
- The Market Shifts Can Be Dramatic
We saw it in 2008, and we’re seeing it again in 2020. Market shifts can be dramatic, volatile, and unpredictable. You can avoid future headaches by really understanding market dynamics before you dive in. However, there are some things that you can’t prepare for.
It’s vital to have plans for worst-case scenarios. You don’t want to go all-in with no cushion. Keep in mind – the commercial real estate market is cyclical, so should the market dip, know that it’s poised to pick back up again. You just have to have the safeguards in place to ride it out until then.
- Consider Energy Efficiency Standards from The Jump
Energy efficiency ought to be a high priority for you. Utilities for commercial properties can be extremely costly, and focusing on energy efficiency is one way to combat those high utility bills.
If you’re shopping for commercial property, be sure to ask about energy efficiency measures. If a property doesn’t have any energy efficiency efforts, you’ll want to figure that into the budget.
Creating an energy-efficient building can be quite a task. Some commercial property owners simply add energy-efficient windows and lighting, architectural grilles, and seal the windows and doors and call it a day.
However, if you want to capitalize on energy-saving potential, you’ll want to do much more than that. Consider reframing and using techniques like ICF construction and materials like tilt up walls to create a tilt up building. Use polyiso insulation, energy-efficient appliances, solar panels, and strategically plan the layout.
While there’s a cost-saving benefit to these upgrades, it could also be a mandatory step to take. As government regulations about energy efficiency get stricter, you might be forced to make these upgrades in the future, anyway. So, it’s essential to know and consider energy efficiency as part of owning a commercial property.
Start Investing in a Commercial Property
If you keep all these five things in mind, you are well ahead of the curve. Commercial property is still a viable and prosperous investment. You just have to know what you’re looking for and how to find it.
Remember, finding a realtor that you trust is key. They can help you avoid the money pits and find the potential.
Corey Tyner is the owner of Cash Land Buyers Arizona and Phoenix Fast Sell. He is one of the top real estate investors in Arizona with over a decade of experience. His work has been featured on Bigger Pockets, Real Estate Agent Magazine, and several other real estate investor publications.